The future of Australian property prices

[SM Junkie]

the numbers simply don't stack up for property as an investment class.

Obviously you either love property as an investment vehicle or not. For me it is far simpler, all I'm concerned about is how much it will cost me on a monthly basis. At the moment my outlay is basically the cost of a standard mortgage, then come tax time and my deductions and depreciation are done and the costs are negated. Now I have built a fairly substantial portfolio that someone else pays for.

So property can make you money. It also provides a more tangable asset and I like to have investments across several asset classes.

 

[kincella]

ubiquitus
you showed just how much you dont know about this subject...
for a start do you really think the banks dont know what is happening with property prices....when so much of their income is generated from home loans...
secondly as an investor....the bank's view the customers ability to service a loan...simple...if your income can support a loan, plus they will factor in the rent one expects to receive....allowing for 4 months vacancy...youre in, you get the loan...
entirely different for a business owner, seeking business funding...where they need projections, and past performance etc...
the two types of loans are vastly different....if one has had experience they would know the difference
as far as luck playing a part.....sure there was some luck, in that properties that I purchased in 2000 to 2002, tripled in value in 2004....so rather than hold for 10 years, I dumped half of them...at a considerable profit...
no one else was in the market when I purchased in 2000- to 2002....I bought a stack of bargain priced properties...
I had a plan when I started investing in property, a long term plan, which will continue on for another 30 or more years....
good luck and bad luck is not included in the plan....its a straight forward plan , using historical figures to justify it....it has worked brilliantly so far...
and will continue to into the future...

 

[MACCA350]

Only during the initial term of the loan - eg. 20 years ago Melbourne's median house price was $140k. A debt of $140k today, at rates of 8%, would equate to $933 pm which would either be easily affordable for the majority of wage earners or covered by current rental income.

Without this debt deflation, in most cases the numbers simply don't stack up for property as an investment class.

Ok, take today's rates:
Inflation 1.3%
Mortgage 6.06%

Inflation being far below the mortgage rate, that cash debt is costing more than it is deflating, so as I said before, this point is moot.

It stands to reason that any bank will never allow their mortgage rate to be below the inflation rate(at least over a medium to long term), since if it were they would effectively be making a loss on the deal.

cheers

 

[Mofra]

Obviously you either love property as an investment vehicle or not. For me it is far simpler, all I'm concerned about is how much it will cost me on a monthly basis. At the moment my outlay is basically the cost of a standard mortgage, then come tax time and my deductions and depreciation are done and the costs are negated. Now I have built a fairly substantial portfolio that someone else pays for.

So property can make you money. It also provides a more tangable asset and I like to have investments across several asset classes.

SM, I also hold investment property - you've only quoted part of my post.
What I said/meant was it doesn't stack up compared to other asset classes without the effect of inflation (in this case, highlighting the effect deflation has on the debt in the longer term).

The other side of the coin is the access to cheap credit available once some equity has been built up, making investment in other asset classes easier as well.

 

[Mofra]

Ok, take today's rates:
Inflation 1.3%
Mortgage 6.06%

Macca, I understand your point (including the argument regarding holding costs impacting on teh debt servicing), but you seem to be slightly misunderstanming mine.

Deflation over the long term devalues cash, it also devalues the value of debt independant of mortgage rates.

$20,000 cash (or $20,000 debt) would have been a significant sum in 1967 (enough to purchase a proprty); it is not such a significant sum today.

 

[MACCA350]

Macca, I understand your point (including the argument regarding holding costs impacting on teh debt servicing), but you seem to be slightly misunderstanming mine.

Deflation over the long term devalues cash, it also devalues the value of debt independant of mortgage rates.

$20,000 cash (or $20,000 debt) would have been a significant sum in 1967 (enough to purchase a proprty); it is not such a significant sum today.

Yes, but that is represented by inflation, is it not?

cheers

 

[UBIQUITOUS]

ubiquitus

I had a plan when I started investing in property, a long term plan, which will continue on for another 30 or more years....
good luck and bad luck is not included in the plan....its a straight forward plan , using historical figures to justify it....it has worked brilliantly so far...
and will continue to into the future...

Kincy,

With statements like the following, I don't think you are in a position to accuse others of lack of knowledge on this:

My Modest 10% pa Growth Projections Over a 5 year Plan.

I am still waiting for you to provide the 10% long term capital appreciation. So if you are in it for the long term (which you have stated you are), then why only do a 5 year plan at 10% pa?

I'll do the maths for you, seeing you are so adverse to providing it (for whatever reason):

An average Sydney home valued today at $550k house, appreciating at 10% pa for the next 30 years wil be worth $9.6million in 30 years

Meanwhile, the average salary of $50k pa, IF it appreciated at an inflation busting 5% pa, for all of those years, would be $216K in 30 years.

So the average house price in Sydney based on the Kincella model will cost 44x average earnings.

Based on a 100% mortgage (which I am sure you will say will be available for borrowers of $10million), the repayments for the average worker would be $64k per month which they would pay from their $18k(gross) per month salary.

Mate, even robots wouldn't go that far. I also notice that you aren't getting any backup form Beej.

 

[Mofra]

Yes, but that is represented by inflation, is it not?

Not quite - the real capital value is represented/impacted by inflation, however the impact of deflation on the debt is rarely mentioned and is also a driver in equity-creation, which is probably a better way of measuring performance than purely on capital return.

 

[MACCA350]

Not quite - the real capital value is represented/impacted by inflation, however the impact of deflation on the debt is rarely mentioned and is also a driver in equity-creation, which is probably a better way of measuring performance than purely on capital return.

Not sure I follow, deflation is the effect of inflation on cash(debt).

The cost of servicing the debt(ie interest, etc) will always be greater than the effect of deflation(if it were not, the banks would go bust).........which in the end means that using debt to purchase property will always cost more in real terms than using cash up front(ignoring other factors like tax write-off's)

cheers

 

[Fleeta]

An average Sydney home valued today at $550k house, appreciating at 10% pa for the next 30 years wil be worth $9.6million in 30 years

Meanwhile, the average salary of $50k pa, IF it appreciated at an inflation busting 5% pa, for all of those years, would be $216K in 30 years.

So the average house price in Sydney based on the Kincella model will cost 44x average earnings.

Based on a 100% mortgage (which I am sure you will say will be available for borrowers of $10million), the repayments for the average worker would be $64k per month which they would pay from their $18k(gross) per month salary.

Mate, even robots wouldn't go that far. I also notice that you aren't getting any backup form Beej.

You've hit on a good point here. House price growth in % terms cannot exceed wage growth in % terms without adversly impacting the ratio of cost to average earnings. This ratio increased as households became duel income - but cannot continue to increase beyond its current all time high - so in my view house price growth is constrained to wage growth. If we get another social change (i.e. people decide they value time more than 2 incomes) then this ratio will decline and house prices with it!

 

[Mofra]

The cost of servicing the debt(ie interest, etc) will always be greater than the effect of deflation(if it were not, the banks would go bust).........which in the end means that using debt to purchase property will always cost more in real terms than using cash up front(ignoring other factors like tax write-off's)

The cost of servicing the debt is reducing in real terms though - 8% of $100k in today's dollars is much cheaper than 8% of $100k in 1980 dollars. The deflation is having a real effect on serviceability, before we consider rents track more closely to AWOTE in capital cities than to CPI, or capital growth will generally track at ~inflation.

Cash up front would make purchasing an individual property cheaper overall, however your ROI would then be measured on the entire acquisition costs rather than your % contribution to it. As a pure asset class, residential property lags behind many others on a dollar for dollar basis so if I wanted to pay cash for an asset, I'd prefer something else.

 

[Mofra]

You've hit on a good point here. House price growth in % terms cannot exceed wage growth in % terms without adversly impacting the ratio of cost to average earnings.

This depends on the area - on a market-wide basis I agree with you, however we exist in a society where the gap between low & high wage earners is increasing, so there are some areas which will grow faster than average wage growth (conversely, some "entry'level" suburbs with higher proportions of FHB will underperfrom the market LT)

 

[kincella]

House Prices
here are just two examples....real prices...
in 1966 a house purchased in a regional city in Vic cost 12,000....it doubled in price every 10 years for the next 40 years to 2006....sold for 192,000

same time a house bought in Melbourne, Armadale for 12,000, it tripled in price every 10 years, after 40 years, the land alone was valued at 1,000,000

sounds like there was something wrong with the prices to begin with....either the city house was very cheap or the country house was expensive....
never the less....in hindsight one would have purchased the city house in preference to the country house....
unless the country house was used as a holiday retreat...

using an annual growth rate of only 7% pa, the price will double every 10 years....

Wages
wages back in 1966 were about $50 pw or 2600 pa....so the house price of 12,000 was above the 4 times mark
fast forward 40 years....that 50 pw is now about 1200 pw....
so what is stopping the same movement or increase over the next 40 years....nothing...
its just getting your mind around the figures....
it will buy you the same thing...same purchasing power....just bigger numbers to deal with...

or if they decided the dollar is only worth half....and split it....nothing would change, just lower numbers to get your head around

 

[UBIQUITOUS]

Kincy I reckon you are severely underestimating the intellect of readers of this forum if you believe that providing obscure examples can be applied to anywhere near a majority of the market.

It would be akin to somebody saying that because Paladin Resources has provided 10000% returns over 10 years, people should buy resource stocks.

 

[kincella]

ubuity....not at all...
but look at you, using figures for an infamous mining company like posiedon as your example.....
then comparing same to housing and wages....

 

[UBIQUITOUS]

ubuity....not at all...
but look at you, using figures for an infamous mining company like posiedon as your example.....
then comparing same to housing and wages....

WHAT???!!???

Please address the my challenge of your model. It has been written here in black and white, so no snaking out it like a politician?

Provide me with a suburb which has given 10% per year over the last 40 years and I will happy to never challenge your models again.

 

[kincella]

well if you can find a free site, where you can plug in the postcode ...I can name a few suburbs....

in the meantime....this link shows 20 years to 2006, with median prices...returning 8.3% every year...
now there are suburbs that beat the median growth....they are not the median price...buying at the lower end...
my 10% growth is based on actual examples....with family and friends
actually I think it will be almost impossible to find a 40 year chart...
there used to be a graph for actual house prices over 100 years in australia, not fudged with cpi and any other stuff....cannot find it now....just the schiller graph from the us comes up...adjusted for this adjusted for that etc


http://www.aph.gov.au/library/pubs/RN/2006-07/07rn07.pdf

 

[UBIQUITOUS]

well if you can find a free site, where you can plug in the postcode ...I can name a few suburbs....

in the meantime....this link shows 20 years to 2006, with median prices...returning 8.3% every year...
now there are suburbs that beat the median growth....they are not the median price...buying at the lower end...
my 10% growth is based on actual examples....with family and friends
actually I think it will be almost impossible to find a 40 year chart...
there used to be a graph for actual house prices over 100 years in australia, not fudged with cpi and any other stuff....cannot find it now....just the schiller graph from the us comes up...adjusted for this adjusted for that etc


http://www.aph.gov.au/library/pubs/RN/2006-07/07rn07.pdf

..and this is the whole point which I am getting at.

Here you have actual data of Australia as a whole at 8.3%, but you would rather go with odd examples of family and friends at 10%. Why not be conservative with your model? It is standard practice to do so.

I've given you the stockmarket equivalent i.e picking a stock that has performed well historically and then assuming that future growth will continue.

I don't disagree with the premise of buying a property and having somebody else pay of your loan. However, if the timing is wrong, then capital losses can be unrecoverable during a lifetime. As an example look at the 1890's Melbourne property crash which took decades to recover from.

The bottom line is the old adage: "Past performance is no guidance to future performance"

 

[MACCA350]

House Prices
here are just two examples....real prices...
in 1966 a house purchased in a regional city in Vic cost 12,000....it doubled in price every 10 years for the next 40 years to 2006....sold for 192,000

same time a house bought in Melbourne, Armadale for 12,000, it tripled in price every 10 years, after 40 years, the land alone was valued at 1,000,000

Take into account inflation at 5%(rough average from here) and you get:

$12k-$192k in 40 years is 7.3%pa, apply inflation and you have a real capital growth of 2.3%pa

$12k-$1M in 40 years is 12%pa, apply 5%pa inflation and you have a real capital growth of 7%pa


Do the same for the property(3.6km from Melb CBD) I mentioned earlier(which you seem to have missed):

$24k(12k pounds)-$795k in 90 years is 4.02%pa, apply 4.5% inflation(as mentioned earlier, ABS 100yr) and you have real capital LOSS of 0.48%pa!!
Just to keep up with inflation that property should have sold for $1.2M

fast forward 40 years....that 50 pw is now about 1200 pw....

It's interesting that based on 5%pa inflation that $50pw is only worth $335pw by today's currency, yet that was the average wage back then and now it's $1,200.

Also interesting that in 1977 it was $200 which is a 15%pa increase, if it continued at that rate we'd have an average income of almost $12,600pw

I'm not old enough to remember the 60's(considering I wasn't even born) but was there some kind of a recession around that time, and subsequent recovery in the early 70's?
Seems something happened around the mid 70's as inflation hit it's all time high around 17%pa

source

cheers

 

[MACCA350]

The cost of servicing the debt is reducing in real terms though - 8% of $100k in today's dollars is much cheaper than 8% of $100k in 1980 dollars. The deflation is having a real effect on serviceability,

I'm not saying its having no effect, I'm saying it's not enough to counter the cost of servicing the loan..........ie interest will always be higher than inflation(over the medium to long term) in which case, as I mentioned, it is moot for my example.

Cash up front would make purchasing an individual property cheaper overall, however your ROI would then be measured on the entire acquisition costs rather than your % contribution to it.

In which case if you paid it off in full over the term it would cost you more than if you paid cash up front in full. Hence once again, for my example, the effects of deflation are moot.........or even increase the capital loss.

Any way you look at it, the costs of servicing the debt are higher than the effects of deflation whether it be on a year on year basis or over the long or full term.

As a pure asset class, residential property lags behind many others on a dollar for dollar basis so if I wanted to pay cash for an asset, I'd prefer something else.

Can't argue with that, just as it should be, since housing is first and foremost to provide shelter and not purely an investment..........though many would argue that fact

cheers