The future of Australian property prices

[tech/a]

I'm not sure where you are based (Adelaide?), but being from WA myself the growth surrounding the north/south freeways has been phenomenal since I moved to Perth to study in 2003. Besides the obvious access it provides to the CBD, it is also positioned relatively close to the coast. For some reason unbeknown to me, people continue to pursue a policy of trading distance from CBD (effectively work) for their own house and garden. Is this something that can continue into the foreseeable future? Or was it a medium term event not too be repeated again until fundamental and vast changes to transport infrastructure occur (think high speed rail)?

Will Australians ever willingly accept highly dense big urban living akin to Western Europe/Japan/States in it's largest cities? And if they do what effect will this have on outlying property prices?

(Not expecting you to take on the burden of answering all those questions Tech - more of a general question to the entire thread's participants)

opps sorry.

 

[explod]

Gold has been a terrible inflation hedge from 1980 for 20 whole years up until about 2000! It's only been a good investment for the last 5-10 years IF you were hedging $US.

Depends on the time frame Beej. My first home in 1971 cost $10,000. The same place today would cost $350,000 ...up 35 times

An ounce of gold in 1971 was $35 and today it is $1,400.......up 40 times

But if you are a trend follower, i.e you move your money to the best growth then a good mix of them all at the right times will beat them all.

This thread gets bogged down by who knows most and what is best. We are supposed to be looking at where the price of property is heading from here today.

History is a help if we look at all of it but that breaks down too because many do not consider that the great depression, for example, could ever happen again.

,

 

[medicowallet]

http://www.theage.com.au/business/home-prices-sag-as-demand-sapped-by-floods-20110228-1ban2.html

"National city home values slumped 1.6 per cent, seasonally adjusted, to $465,000 after rising 0.2 per cent in December, according to RP Data-Rismark figures. Outside cities, they declined 1.2 per cent in the month.

The 1.6 per cent decline was the largest since 2005 when the index began, RP Data's research director Tim Lawless said.

Advertisement: Story continues below Home prices in Brisbane slumped 2.3 per cent in the three months to January, while they fell 1.9 per cent in Melbourne over that period. Prices fell 3.8 per cent in Canberra, 1.4 per cent in Sydney, 1.3 per cent in Adelaide and 2.6 per cent in Perth. Hobart bucked the trend, rising 0.6 per cent over the three-month period"

So I guess that the highly leveraged property investor saw returns well in excess of 1.6%, what, probably 15%?

Well that doesn't sound like a good quarter to me, pity the average "punter" has no idea of this VOLATILITY, as their house is "different"

 

[Tysonboss1]

Depends on the time frame Beej. My first home in 1971 cost $10,000. The same place today would cost $350,000 ...up 35 times

An ounce of gold in 1971 was $35 and today it is $1,400.......up 40 times


,

Now plus the rental return on the house and minus storage costs of the gold and see where you are at.

 

[Tysonboss1]

Finally, I believe that investing in property in the current market is over valued (based on the levels of debt, the potential slowdown in the resources boom, and the high median value compared to median salary) and a disaster if you leverage to the point where you may be forced to sell. If property does crash - I'll be in there like a shot. If it doesn't crash and stagnates for a few years I'll be in then (I already own a PPOR). If it just goes up forever, then I made a bad investment decision. I prefer to preserve capital and miss an opportunity I am uncomfortable with. There will be other opportunities that I am comfortable with.

AlexG.

I agree with the basic outline of your thoughts, Property atleast the ones I own and areas I have looked at buying are more expensive now when compared to levels I was buying at prior to 2004 when compared to the rental return earned. If a crash brought the price down or stagnation kept the prices on hold while rental returns grew I would look at buying.

the basic formula I use ( and it's subject to different styles of property) is

Annual rental return x 0.85 (to allow for rates maintaince etc) X 22.5 = the highest price I can pay.

In 2001 in brisbane these type of properties were every where, now they are not.

The first house I bought was on a mulitple of just over 19, But brisbane had gone through a long period of stagnation through the 90's.

The first house I bought was for $218,000 in 2001. since rental increase ove the years if I were to buy it on a multiple of 22.5 i couldn't pay more than $422,662 but it could sell now for closer to $480,000 - $500,000. So I would say it is over valued, when I do my rental increases in march the estimated IV will go up a bit but it will still be somewhere between 10% - 20% over it's estimated IV.

So there is a bit of froth in the market, Atleast in my opinion based on the valuing mechinisms I use. But you can see anybody that believe that the capital gain experianced in the last 10years is a speculative bubble are a little bit out of touch, Yes the sale value of my first house has risen from $218,000 to over $480,000, but the IV value based on rental return has also increased a whole bunch, So even if there was a "crash", to expect falls larger than 10% is a little crazy, Offcourse it is not immpossible, But if it were to happen it should not be somthing to fear it should be thought of as a wonderful opportunity.

But as I said I am not holding my breath, Stagnation is the most likly outcome, with maybe 5%-10% declines in some areas.

But hey I am not prophit, I am just saying what is rational based on valuations of earning power, MR market can do anything

 

[medicowallet]

the basic formula I use ( and it's subject to different styles of property) is

Annual rental return x 0.85 (to allow for rates maintaince etc) X 22.5 = the highest price I can pay.

In 2001 in brisbane these type of properties were every where, now they are not.

I like the use of the formula, but don't despair, it will no doubt become much easier to purchase a house in brisbane over the next couple of years as their prices continue to fall.

 

[Wysiwyg]

Depends on the time frame Beej. My first home in 1971 cost $10,000. The same place today would cost $350,000 ...up 35 times

An ounce of gold in 1971 was $35 and today it is $1,400.......up 40 times

Hi Explod. Just pointing out to viewers the obvious 'inflation' factor isn't considered here. According to the RBA inflationary calculator, 10k in 1971 would now have the purchasing ability of 92k using an average annual rate of 5.9%. So an increase in inflation adjusted terms to 350k is around 3.8 times.

 

[Tysonboss1]

Hi Explod. Just pointing out to viewers the obvious 'inflation' factor isn't considered here. According to the RBA inflationary calculator, 10k in 1971 would now have the purchasing ability of 92k using an average annual rate of 5.9%. So an increase in inflation adjusted terms to 350k is around 3.8 times.

Yes, Indeed. What you have noticed is in the past 30years property values have grown faster than inflation, this is due to a number of factors.

- growth in housholds ( there is more households due to population growth, more single parent families and single person house holds) this puts upward pressure on land prices as we all keep trying to squeeze into the capital cities.

- Better more expensive homes, The average house has more mod cons these days

Property Prices would only match inflation perfectly if the number of house holds remained the same, growing population obviously puts upward pressure on land prices as you knock down houses and build apartments, those who want to live in a house on land are forced to pay higher prices as over time the population grows and number of houses close to the city declines.

They can move further out to outlining suburbs and it will be cheaper but again it would be putting upward pressure on prices out there.

I know there are people on this thread that do not believe land prices can ever outpace inflation or wages not matter how large the population or how dense the dwellings get, But I am not intersted in that arguement, I have been there and done that multiple times on asf.

All I will say is that the price of land will increase faster than inflation if the population density keeps increasing. for example the house block that sold as a median family home in parramatta in the 60's is worth much more than the inflation adjusted price when a developer wants to put a 10story apartment on it.

And as we keep knocking down these family homes more and more people are forced to out bid each other for the remaining un affected neighborhoods, So the price will grow faster than inflation, and the poor people live in apartments and these apartments must stay in certain limits as decided by wages, but the land they were built on will not.

 

[sinner]

Yes, Indeed. What you have noticed is in the past 30years property values have grown faster than inflation, this is due to a number of factors.

- growth in housholds ( there is more households due to population growth, more single parent families and single person house holds) this puts upward pressure on land prices as we all keep trying to squeeze into the capital cities.

- Better more expensive homes, The average house has more mod cons these days

Property Prices would only match inflation perfectly if the number of house holds remained the same, growing population obviously puts upward pressure on land prices as you knock down houses and build apartments, those who want to live in a house on land are forced to pay higher prices as over time the population grows and number of houses close to the city declines.

They can move further out to outlining suburbs and it will be cheaper but again it would be putting upward pressure on prices out there.

Demand without credit availability is no demand at all.

Hence, all your above points would be meaningless without an abundance of cheap cheap credit.

 

[Tysonboss1]

Demand without credit availability is no demand at all.

Hence, all your above points would be meaningless without an abundance of cheap cheap credit.

interest rates go up, interst rates go down. credit lossens, credit tightens. Over time it all balances out.

 

[sinner]

interest rates go up, interst rates go down. credit lossens, credit tightens. Over time it all balances out.

Except, when it doesn't.
Global credit has been on a 10 year downtrend in cost since Alan Greenspan opened the money spigot 12th Sept 2001. Credit was cheaper everywhere including and especially Australia (what is the correlation between interest rates for Aus and US since 2001? - I dare you to check). So um yeah...it probably will balance out, by going back to the way it was at some point, but I'm pretty sure that's not what your dismissive statement meant. The point is all your above premises are based on the recency bias of cheap available credit, nothing more.

You just can't bid up more than the next guy if the bank isn't offering to loan you more money than the next guy. It's simple maths. As a country we just aren't rich enough to be bidding assets up using cash. We use credit. Therefore, once the credit is no longer cheap and easy there will be less idiots bidding up more than the last guy "before they miss out".

 

[Junior]

Now plus the rental return on the house and minus storage costs of the gold and see where you are at.

Plus Rental Income

Less Interest
Maintenance
Rates
Land Tax
Agent Fees
Legal Fees
Renovation/Building costs (you've had this property for 40 years, so may have had to rebuild or renovate)

 

[sinner]

Now plus the rental return on the house and minus storage costs of the gold and see where you are at.

So you can clock the yield on a house but not yield on gold?

Nope, wrong.

http://www.kitco.com/lease.chart.html

 

[Dowdy]

Now the RBA admits there is a bubble....

RESERVE Bank board member Warwick McKibbin has warned that Australia is being caught up in a global bubble that could hit us much harder than the global financial crisis and expose the weaknesses of Labor's economic settings.
Professor McKibbin told The Australian the bubble in global commodity prices and property markets in Asia threatened to dwarf the US housing market bubble that led to the GFC in 2008.
He warned that the inevitable bursting of the bubble would reverse the surge in Australia's record high terms of trade, push down the dollar and leave the Reserve Bank struggling to fight off rising global inflation pressures.
"This is shaping to be much bigger than 2004 to 2007," he said in comparing the new excess of global liquidity with the global financial bubble that led to the worst global financial crisis since the 1930s.

"This cycle is even bigger."
Professor McKibbin suggested the surge in global liquidity fuelled by US monetary expansion had echoes of the early 1970s surge in food, mining and energy prices that led to global "stagflation", or the combination of high inflation and high unemployment.


Read more: http://www.news.com.au/business/big...in/story-e6frfm1i-1226013248289#ixzz1FEQUMtov

 

[Tysonboss1]

You just can't bid up more than the next guy if the bank isn't offering to loan you more money than the next guy. It's simple maths. As a country we just aren't rich enough to be bidding assets up using cash. We use credit. Therefore, once the credit is no longer cheap and easy there will be less idiots bidding up more than the last guy "before they miss out".

You can if you are out bidding the "next guy", because your going to build 10 apartments and sell them to ten other "next guys", at rates that can be afforded when compared to average wages.

It is simple and mathamatically true that eventually, If density keeps growing in any given city the average guy can not afford to own a house and land package, and the average home must become higher density eg. town houses or apartments, and the big family home on a 1/4 acre will become the realm of the high income earner, and if the average guy trys through the usage of debt, he will get burned when the wind changes.

As I said, the price of accomadation or dwelling or the family home (insert whatever term you like) must stay in the realms of what can be afforded by the average wage, and this may be subject to flucuations, But what I was commenting on was that the price of land can outpace inflation if the density of the dwelling keeps increasing due to population growth.

But as I said, I am not getting into an arguement, feel free to make your point. I will aggree to disaggree.

After all time will tell and we don't all have to aggree, things either happen or they don't.

 

[Tysonboss1]

Plus Rental Income

Less Interest
Maintenance
Rates
Land Tax
Agent Fees
Legal Fees
Renovation/Building costs (you've had this property for 40 years, so may have had to rebuild or renovate)

OMG!!!! there we go again

People always bring leverage into the discussion when talking about property, but fail to apply leverage to the other assett class.

as I said a million times, If you use leverage in the property example you have to use it in the gold example, Now I can tell you if you leveraged into gold 40 years ago since it produces no income you would be well and truely under water. But the property with all the costs mentioned would still be well in the black.

The rent more than covers the cost of maintaince and rates etc, as I said those costs are only about 15% of the rent collected.

If you did want to use leverage during that time, It would not have been a negative to the operation it would have increased the return of the property portfolio compared to gold.

 

[Tysonboss1]

So you can clock the yield on a house but not yield on gold?

Nope, wrong.

http://www.kitco.com/lease.chart.html

To be honest I had never heard of leasing gold, But after a bit of quick reading it seems it is in the territory of large central banks leasing 1000's of ounces to other central banks and charging amounts less than 1% p/a, one eample I saw was 0.1%. I am open for correction though.

 

[tothemax6]

as I said a million times, If you use leverage in the property example you have to use it in the gold example, Now I can tell you if you leveraged into gold 40 years ago since it produces no income you would be well and truely under water.

Yeah true, it only works during periods of negative real interest rates.

 

[mazzatelli]

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.

I am not referring to a cash vs. property debate for inflation hedging, as in general the majority of real assets will outperform cash.

I am asking:
1) Is property the best tool for hedging inflation and;
2) If so, which is better - property financed with cash or credit?

 

[ginar]

Yes I know know the strengths and weaknesses of both asset classes very well. I have not been trying to make posts that start the tired old "shares vs property" arguements again.

I have been investing in the stockmarket since I was 14 and the property market since I was 20, I have built an investment operation that uses Property, shares and my own business ( along with some options ), that produces steady all weather returns. and I do this with next to no trading.

Look, anyone that says Property is better than shares is just as wrong as any body that says shares are better than property, In my opinion an investment operation that excludes either one is lacking. But it's your life so do whatever.

I don't care if people dismiss my thoughts or opinions, People can say what they like, But I am not 30 yet But I am in a position where I can retire on multiple passive income streams that don't require super high trading profits or anything unsustainable like that, My investment operation will survive any market crash (property or shares) and thrive in the after math. So I don't really care if some geek disaggrees with me.

another figjam character , well mate im not exactly poor , im well north of 30 and im certainly no geek . once again i find this cyber world full of utter gentleman . nothing youve said had adressed any of my opinions but then again i rarely expect that from anyone . another thread that has trully wasted my oxygen . carry on