The future of Australian property prices

[Beej]

However, I disagree that property is not as volatile as shares. In my opinion it is just as volatile on a day to day basis, it is just that the owners cannot see it and/or are naive to the concept.

This statement simply shows that you do not understand what volatility actually is. Tysonboss is 100% correct and it can be proven easily mathematically - Australian residential property is an asset class with far lower historical price volatility than the share market.

Cheers,

Beej

 

[Tysonboss1]

In an inflation hedging context, is this assuming the property has been bought with cash or credit-based?

Leverage is a separate topic, again if you want to include leverage then you have to include it in the example of the cash investment, which would also be negatively geared.

I am talking about putting $300K into a property vs $300K into a cash investment.

With leverage the property would win hands down against a cash investment that uses the same leverage.

Property with 7% interest would be funded by - 4% rent cashflow + 3% Inflationary pressure on capital value + 2% growth in demand + cashflow would grow with inflation.

Cash investment with 7% interest being paid and 6% interest being earned would suffer- exponential decay of the capital from negative gearing and then exponential decay of value from inflation.

I was comparing holding $300K in property rather than say a term deposit.

As mentioned above debt is a separate topic.

 

[FxTrader]

This statement simply shows that you do not understand what volatility actually is. Tysonboss is 100% correct and it can be proven easily mathematically - Australian residential property is an asset class with far lower historical price volatility than the share market.

Well let's here about your understanding of volatility and how one should react to it then shall we.

Historical volatility over what time frame, 2,5,10,50 years?

Is the fact that median Noosa Heads house prices have fallen 50% in four months indicative of high or low volatility, why or why not?

What is the current implied volatility of the top housing markets in Australia and should we try a time the market based on volatility, or doesn't it matter?

Should property be purchased when current implied volatility is high for a given market (e.g. should you have purchased property in Noosa Heads when you saw prices rising sharply in early 2010 or should you purchase now that they have fallen 50% since Oct10?)

 

[Tysonboss1]

Should property be purchased when current implied volatility is high for a given market (e.g. should you have purchased property in Noosa Heads when you saw prices rising sharply in early 2010 or should you purchase now that they have fallen 50% since Oct10?)

focusing on one suburb is like focusing on one share, you may beable to find examples where one suburb has had large declines over a period of 12 months, But there are hundreds of example where shares have had large falls in the space of a day.

In my view, I would purchase a property when the price that you pay is sensible when compared to the future earning power (investment) or when the price is sensible when compared with the lifestyle benefits it will offer (ppor).

By the way I have not purchased a property since 2004, But I would if the right property came up at the right place and there were opportunities else where tp deploy cash.

 

[Beej]

Well let's here about your understanding of volatility and how one should react to it then shall we.

Historical volatility over what time frame, 2,5,10,50 years?

Is the fact that median Noosa Heads house prices have fallen 50% in four months indicative of high or low volatility, why or why not?

What is the current implied volatility of the top housing markets in Australia and should we try a time the market based on volatility, or doesn't it matter?

Should property be purchased when current implied volatility is high for a given market (e.g. should you have purchased property in Noosa Heads when you saw prices rising sharply in early 2010 or should you purchase now that they have fallen 50% since Oct10?)

You cannot take a single suburb monthly median price stats and infer anything about the current value of a particular house in that suburb - the sample volume is just too small as there may only have been a few houses sold in a given month, and they could have been at the really expensive or the really cheap end of the market, resulting in MEDIAN price volatility, which is very different to an individual properties actual price volatility. It's a bit like inferring that your Woolworths shares have dropped in value by 50% because the Westfarmers price fell.

If you look at the price history of property as an asset class (say at a city or national level), and compare that price history to a broad stock market index over ANY period of time (take your pick, 2, 5, 10, 20 years), and look at the price volatility on a monthly or yearly basis, then it is indisputable that property prices in Australia are less volatile than ASX shares.

Cheers,

Beej

 

[againsthegrain]

I went to the local lender and wanted to take a loan for 10 houses, since the market always goes up I promised to pay it all back + interest in 1 year when I sell at 10% - 20% profit, but it didn't work. I even told him about robots and his guarantees, still didn't work

 

[nunthewiser]

I even told him about robots and his guarantees, still didn't work

Mmmmmmm

your fixation on associate proffessor robots in this thread is bordering on unhealthy, and now it seems has spread to the outside world.

please see a doctor.

 

[FxTrader]

You cannot take a single suburb monthly median price stats and infer anything about the current value of a particular house in that suburb - the sample volume is just too small as there may only have been a few houses sold in a given month, and they could have been at the really expensive or the really cheap end of the market, resulting in MEDIAN price volatility, which is very different to an individual properties actual price volatility. It's a bit like inferring that your Woolworths shares have dropped in value by 50% because the Westfarmers price fell.

Instead of answering my questions about volatility and its application, you instead erect a straw man argument around the misuse of statistics, attack it and infer that I am generalizing about the property market as a whole when I clearly and certainly did not. If you can't or don't want to directly answer the questions put to you then fine, but don't sink to the level of useless banter and frivolous arguments.

I gave you published statistics on the Noosa Heads property market median prices over the last 12 months. These stats have very real meaning to the poor saps who paid over a million dollars for property in Noosa Heads just 4 months ago. To them, there is no comfort that shares have been more volatile over the last 50 years.

If you look at the price history of property as an asset class (say at a city or national level), and compare that price history to a broad stock market index over ANY period of time (take your pick, 2, 5, 10, 20 years), and look at the price volatility on a monthly or yearly basis, then it is indisputable that property prices in Australia are less volatile than ASX shares.

Focus only on the Australian stats does not redeem your or Tyson's arguments here. The fact, and point, is that high volatility exists in the property market from time to time, whether or not that volatility has been less than shares over a given time frame is irrelevant. At least with shares you can protect yourself from downside risk.

 

[white_goodman]

you cant look at any one suburb for stats or signs of volatility when such little transactions take place and any one sale can skew the data... its not a good argument for price volatility.

 

[awg]

In an inflation hedging context, is this assuming the property has been bought with cash or credit-based?

I was comparing holding $300K in property rather than say a term deposit.

As mentioned above debt is a separate topic.

Interesting question ( to me at least )

Can arise when neutrally geared...whats the pros and cons of pay interest-only and let the debt deflate ?

 

[Beej]

Instead of answering my questions about volatility and its application, you instead erect a straw man argument around the misuse of statistics, attack it and infer that I am generalizing about the property market as a whole when I clearly and certainly did not. If you can't or don't want to directly answer the questions put to you then fine, but don't sink to the level of useless banter and frivolous arguments.

I erected no straw man there - I simply leveled the obvious criticisms of the specific example you put up to back your point.

I gave you published statistics on the Noosa Heads property market median prices over the last 12 months. These stats have very real meaning to the poor saps who paid over a million dollars for property in Noosa Heads just 4 months ago. To them, there is no comfort that shares have been more volatile over the last 50 years.

Well why don't we look at the annual median prices from your same source?

Year Median House Price House Price % Change (YoY) Median Unit Price Unit Price % Change (YoY)
2002 $375,000 38.9% $430,000 8.2%
2003 $573,750 53.0% $605,000 40.7%
2004 $595,000 3.7% $680,000 12.4%
2005 $660,000 10.9% $680,000 0.0%
2006 $630,000 -4.5% $730,000 7.4%
2007 $727,500 15.5% $690,000 -5.5%
2008 $760,000 4.5% $707,500 2.5%
2009 $675,000 -11.2% $565,000 -20.1%
2010 $650,000 -3.7% $614,500 8.8%

As you can see - 16.9% decline in annual median price from the 2008 peak. hardly the 50% you are claiming from the more volatile and less statistically significant monthly figures. What's more is these figures show that anyone who bought more than a few years ago is still well in front in any case, and as pointed out in other posts you buy property for the long term not the short term. And this is in one of the "tourist/retiree" property belts of SE QLD - areas that we know are the most volatile of Australia's property markets historically anyway and currently are impacted by the struggling domestic tourism sector. Any any case, the realestate.com.au figures are raw unstratified median prices as well meaning they can be easily influenced by the sales mix etc, and so still carry a degree of "noise".

PS: Here is the APM price data for Noosa which is collected in a more considered way - same current median price, but differing annual changes:

http://www.domain.com.au/Public/SuburbProfile.aspx?suburb=Noosa&postcode=4567&mode=buy

Focus only on the Australian stats does not redeem your or Tyson's arguments here. The fact, and point, is that high volatility exists in the property market from time to time, whether or not that volatility has been less than shares over a given time frame is irrelevant. At least with shares you can protect yourself from downside risk.

In case you hand't noticed this is the "Australian" property thread - I have never been considering nor have been discussing any other market with any of my comments.

When compared to the share market, property can be easily shown mathematically to have lower price volatility over any time period. Full stop. None of your obfuscation changes this fact.

Cheers,

Beej

 

[Tysonboss1]

Interesting question ( to me at least )

Can arise when neutrally geared...whats the pros and cons of pay interest-only and let the debt deflate ?

Personally I am not a fan of interest only. I work on a low debt model and prefer to always have my debts exponentially decaying.

Some people use the words "good debt (investment debt)" and "bad debt(personal debt)", I understand the high debt model with all it bells and whitles, you know high growth, tax deductions etc.etc.

But for me personally I think of it as "Bad debt" and "worse debt", Debt can be nessasary and at times extremely rwarding when you can pick things up at for less than they are worth, But it's not somthing I want lingering, I want my cash flows from my Investments growing, clearing debt does this.

 

[kincella]

I think its funny comparing apples with ....oh I dont know....there is almost no comparison...
everyone needs shelter, and most prefer a house....
a huge % of those homeowners, have very little interest in the stockmarket.....if they do, it is because of compulsory superannuation.....

almost no-one needs stocks or other forms of investments.....
so people can live without an investment of any type.....

most cannot live without a roof over their heads.....it is the most basic of necessities
since the govnuts basically stopped building public housing in the 70's, the onus shifted to the private sector to provide housing for those who choose to rent.......
with tax incentives to property owners
last time I looked rentals were 30%, owners 70%....of the 30% rentals, there was 10% in public housing, 20% other investors....
majority of property investors are home owners, they treat it as a set and forget investment.....they know there will be dips and troughs, but overall the rise in value will be there after 10 or 20 years.....

for Robots, I note Ballarat rose 19% last year....see the REIV site, then to bottom of the page regional median
http://www.reiv.com.au/home/inside.asp?ID=1048&nav1=1226&nav2=165&nav3=1048

I note even after 4 interest rate rises last year, in the middle of this prolonged GFC, the median price of the last auctions in Melb was 808,000.....are they crazy....
they are not fhb's, so who are they.....maybe the upgraders are on the move....buying and selling in the same market....
and, what on earth were they doing in Ireland, between 2000-2008, with a population of only 6.5 million, they built an extra 300,000 new houses...thats 5% of the population...
now the Irish are fleeing Ireland, up to 10% of them are moving anywhere else...visas to come to OZ are up 60%...its very interesting.....

check out the abc site foreign/ correspondent...story on ireland
http://www.abc.net.au/foreign/
and this book, plenty of information on that topic if one cares to research, or google it
http://www.nybooks.com/articles/archives/2010/nov/11/ireland-rise-crash/

 

[FxTrader]

When compared to the share market, property can be easily shown mathematically to have lower price volatility over any time period. Full stop. None of your obfuscation changes this fact.

I am not comparing share price volatility with property price volatility, that is your obsession not mine, and a useless one I might add.

Since you have answered none of my original questions on volatility it is you engaging in obfuscation and misdirection. Your myopic focus on the Australian property market conveniently ignores the occurances of high price volatility in other world property markets as well. Calculation of volatility includes a time period component, and large swings in property prices can and do occur over short periods of time in property markets, just as in shares.

Interesting that you refer to the share market as a collective whole, not individual shares whose volatilities vary greatly, a glaring hole in your shallow comparative analysis. By all means provide your volatility analysis between the asset classes since it's so easy to calculate, but in doing so include all the other sub indices, not just the All Ords. Not that such an effort would provide any useful information for a potential property investor.

Out of curiousity, just what point do you hope to make here with your line of argument, that property is a safer or better investment than shares because it's less volatile or are you just engaging in petty point scoring by referring to comparisons that have no relevance to property investors?

 

[tech/a]

Personally I am not a fan of interest only. I work on a low debt model and prefer to always have my debts exponentially decaying.

Some people use the words "good debt (investment debt)" and "bad debt(personal debt)", I understand the high debt model with all it bells and whitles, you know high growth, tax deductions etc.etc.

But for me personally I think of it as "Bad debt" and "worse debt", Debt can be nessasary and at times extremely rwarding when you can pick things up at for less than they are worth, But it's not somthing I want lingering, I want my cash flows from my Investments growing, clearing debt does this.

I ONLY work on interest only.
Its all tax deductible so I make the most of it.
I want as much free capital as possible for future opportunities and cash flow.

 

[tech/a]

Interesting that you refer to the share market as a collective whole, not individual shares whose volatilities vary greatly, a glaring hole in your shallow comparative analysis

Selective arguement.
I can detail areas of Australian market which have seen 1000s% return in 10 yrs just like the Stock market individual stocks.

If your experienced in either you'll out perform the market.
If your complete idiot and remain in the market you'll gain long term in both.
IF you have money in either.

 

[medicowallet]

This statement simply shows that you do not understand what volatility actually is. Tysonboss is 100% correct and it can be proven easily mathematically - Australian residential property is an asset class with far lower historical price volatility than the share market.

Cheers,

Beej

So what is the daily volatility of residential property?

Because each individual house is individual, how did my house value track monday to sunday last week?

I can tell you how my BHP shares went.

In fact, I have a rental in rural NSW I have owned for 12 years, how much is it worth today?

How much is it worth tomorrow?

Fact is, it may be worth 2-3% less than a week ago due to the new tax, or drop 2% after an interest rate hike, but who knows??

 

[medicowallet]

Year Median House Price House Price % Change (YoY) Median Unit Price Unit Price % Change (YoY)
2002 $375,000 38.9% $430,000 8.2%
2003 $573,750 53.0% $605,000 40.7%
2004 $595,000 3.7% $680,000 12.4%
2005 $660,000 10.9% $680,000 0.0%
2006 $630,000 -4.5% $730,000 7.4%
2007 $727,500 15.5% $690,000 -5.5%
2008 $760,000 4.5% $707,500 2.5%
2009 $675,000 -11.2% $565,000 -20.1%
2010 $650,000 -3.7% $614,500 8.8%

What's more is these figures show that anyone who bought more than a few years ago is still well in front in any case,

If you bought in 2003 you are better off, any later and you are worse off (units that is)

And also, a "median" house in 2010 does not equal a "median" house in 2003

 

[Wysiwyg]

If you bought in 2003 you are better off, any later and you are worse off (units that is)

And also, a "median" house in 2010 does not equal a "median" house in 2003

'Median' is a good guide but where are the 1000% price increases holding it up?

 

[FxTrader]

I can detail areas of Australian market which have seen 1000s% return in 10 yrs just like the Stock market individual stocks.

Well this has nothing to do with the volatility argument but since you bring this up, please do give some examples of where established residential property (the category most IP investors invest in) returned 1000% plus in 10 years.

If your experienced in either you'll out perform the market.

True, depending on how you define experienced.

If your complete idiot and remain in the market you'll gain long term in both.

Quite incorrect, there are so many examples. Take TLS (a widely held, blue chip mom and pop stock), calculate it's 10 year return and report on those gains for me.

As for the question in your chosen graph, "Are Australian property prices cheap or in a bubble?" while looking at a spike in a logarithmic plot, wow that's a tough question. LOL