The future of Australian property prices

[Bill M]

http://www.netcastdaily.com/broadcast/fsn2011-0301-1.mp3

Tooooo Tooooo friggin long man and an American commentary at that. You are doing the right thing white_goodman, living in your parents house and saving your money. There is nothing wrong with living like that and saving your $$$$$. That's the best way to build up your funds. If a plunge happens like you suggest then you can act, if it doesn't then you keep saving the $$$$ and buy at full price anyway. Either way you win.

 

[medicowallet]

Hello greebly24, I wanted to quote your whole post but people don't like you doing that. Anyhow thanks for a well balance post and opinion. Just thought I would add that when I borrowed for my first mortgage in 1979 my interest rate was 11% then. Rates hit 17.5% at one stage many years later. I still made money on my properties regardless of that. It has never been easy to invest in and make money in property but one thing for sure prices just keep climbing. Yes you have some flat or slightly negative years but nothing like the share market crashes of 87 and 2009 where people lost half their money. Your post is good reading for anyone wishing to buy, everything you wrote should be considered, cheers and thanks.

And this is the clincher.

Back in the day we COULD purchase a house and live in it with single income, through tough times.

Nowadays, it will take much less shock to kill the system.

Not only that. Here is the clincher::

Do you think the world will continue to prop up our property market if China has a hiccup?

Uh oh, then we will see some interesting times.

 

[So_Cynical]

No, Gorokan on the Central Coast is an older suburb that most oldies retired to back in the 60's and 70's, hence there is lot of fibro, timber or clad cottages. It is also an old tourist town just up from Toukley. There is some housing commission in the area but it's not overloaded. To be honest if one was hard up for cash and had to retire with limited funds you could buy a place for around 210K to 250K not far from the lake and club and just take it easy. Of course the commute to Sydney if you had to work could be a drag but what I was trying to point out was that there are cheap houses around, cheers.

I mite pop up on the weekend and have a look, while the weather is still good Gorokan sounds a bit like Umina? old smallish fibro places, i agree that one could do alot worse than a 250K place on the Central coast.

 

[tothemax6]

So is the property market crashing yet? I am waiting for this crash that means I can buy a house .

 

[Tysonboss1]

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?

Still awaiting you expert opinion on this Tyson...

1, Well whether it is the "Best" depends on opinion, I would say it is one of the best. Offcourse there are assets that will grow faster, Like a good business with 30% ROE reinvesting all earnings, But then there are higher risks with this type of thing and less incomes. As I said earlier I have property inside my portfolio because I like the steady cash flow that will increase with inflation and the thought that I won't lose value on the capital (outside normal fluctuations) to inflation.

2, When it comes to Investing I believe a low debt model is best ( but thats my opinion). that way it keeps the cashflow positive, you have less risk of having to be forced seller if rates skyrocket, and you are not putting as much hope on quick capital gains. Also I view property as an inflation hedged income stream, but as soon as you load up to much debt you start to lose your income to interest payments.


I have seen my grandmother lose her entire net worth to inflation, this is why I recommend if people are going to rely on income from their assets they have to hold their wealth in somthing that produces income (that will feed them), while this income also increase with inflation, Property is a worry free investment that achieves this.

In the early 70's My Grandfather died, and My grandmother sold his IP and banked the cash a bit over $3500 Because she could earn more interest on the cash than the rent provided. That $3500 produced enough interest to maintain her home and supplement her small pension, and she could live quite well.

Fast forward 30 years and the $3500 which she still has, earns about $200 a year, which is nothing, if you kept the house it would be paying over $14,000 per year and she would have a lump some of $350,000 in capital value.

 

[FxTrader]

In the early 70's My Grandfather died, and My grandmother sold his IP and banked the cash a bit over $3500 Because she could earn more interest on the cash than the rent provided. That $3500 produced enough interest to maintain her home and supplement her small pension, and she could live quite well.

Fast forward 30 years and the $3500 which she still has, earns about $200 a year, which is nothing, if you kept the house it would be paying over $14,000 per year and she would have a lump some of $350,000 in capital value.

A sad story, however in this case your grandmother had an income producing property with no/low borrowings and my guess would be that the median income to median house price ratio was very low.

How would you achieve this now and what is low debt? The REIV now reports that the median house price in Melbourne for the Dec quarter was $600,000! Therefore, 80% leverage requires a $120,000 deposit at the median price. How long would it take the average wage earner to save $120k? Is 80% low debt/leverage? The property bubble is a debt bubble where many are living paycheck to paycheck to stay in their PPOR let alone buy an IP - a precariously balanced situation.

Back to your grandmother's story, at least she has a pension to fall back on. My sister bought a home right on the water in Hawaii (sure thing) and paid much less than the median at the time. Now it's worth 50% of what they paid (debt bubble + GFC) and they are essentially bankrupt in their fifties. Buying a property while we have an explosion in household debt levels will probably not end well for many.

 

[AlexG1]

An intertesting article from Steve Keen (hot off the press) http://www.talkfinance.net/f47/australian-debt-update-8974/

Convincing arguments as to why we'll see a continued decline in prices. Essentially - in a nutshell strong evidence that rising house prices are strongly correlated to household debt. Debt levels in Oz are now falling (as would be expected from the current high levels) hence expect housing prices to fall.

Been a common theme on this thread - but well presented with evidence in the linked post. I know many here are dismissive of his arguments - but they certainly look solid to me.

Patiently waiting.

Alex.

 

[Greg]

So is the property market crashing yet? I am waiting for this crash that means I can buy a house .

Hi tothemax
I'm not sure that the Australian property market will ever really "crash" in the way that we have seen overseas (U.K. and U.S. specifically) as their attitudes and financing systems are so very different to ours.

I guess it all depends on what you define as a "crash". If you mean putting a house on the market for less than someone paid for it, that already happening in a number of places, including Queensland, and has been for about 2 years (and it's only getting worse I'm afraid). But if you mean picking something up for a fraction of what it cost, I'm not sure that's going to happen.

I'm assuming that you are also talking about "normal" and "first time buyer" housing sector (in the $350k - $500k range) because if your talking about the multi-million dollar homes, then they are already crashing in relative terms.

My opinion is that prices are going to be quite stable for a little while with maybe a slight trend down for the next couple of years and then a gradual climb will begin once things (like our government and interest rates) settle down a bit. I hope that helps and I wish you luck in getting into the housing market; it's a great thing to do in the longer term.

All the best
Greg

 

[schnootle]

I have seen my grandmother lose her entire net worth to inflation, this is why I recommend if people are going to rely on income from their assets they have to hold their wealth in somthing that produces income (that will feed them), while this income also increase with inflation, Property is a worry free investment that achieves this.

In the early 70's My Grandfather died, and My grandmother sold his IP and banked the cash a bit over $3500 Because she could earn more interest on the cash than the rent provided. That $3500 produced enough interest to maintain her home and supplement her small pension, and she could live quite well.

Fast forward 30 years and the $3500 which she still has, earns about $200 a year, which is nothing, if you kept the house it would be paying over $14,000 per year and she would have a lump some of $350,000 in capital value.

I enjoy your contributions Tysons and your arguments make a lot of sense (Doesn't mean I completely agree though). It is not like you can't maintain your capital and take an income from a savings account. I am earning 6.5% in a Ubank account, I can put enough back and still take a small income.

The next 40 years are going to be different to the last 40. You can guarantee cheap oil will be gone, you can guarantee cheap fossil fuels will be gone, will we be spending the same percentage of income on the same house when energy costs will command a greater share?

 

[CamKawa]

Australian homes most overvalued - survey

AUSTRALIANS love to watch their home values rise but a leading magazine says they are way overvalued.

The latest quarterly index of global house prices published in The Economist shows Australian homes are the most overvalued in the world, ahead of Hong Kong and France.
While the magazine said the local economy was strong, its index may renew fears of a house price bubble in Australia.

"There may be good reasons for Australian prices to have risen so far but people made similar, and ultimately incorrect, arguments for the run-up in prices in the West," it said.
The ratio of house prices to rents in Australia is 56 per cent above its long-run average between 1975 and 2010, it found.

The ratio in Hong Kong, the second most overvalued market, is 54 per cent followed by France at 48 per cent.

In the US, which experienced a hefty decline in property prices during the global financial crisis, house prices to rents were only overvalued by three per cent.

Source: http://www.heraldsun.com.au/news/br...vervalued-survey/story-e6frf7ko-1226015960562


The Economist Interactive chart

 

[tech/a]

Tyson
I make your grand mother around 125!!!
I agree property is a great hedge on inflation and
Held under credit as an IP is preferable
In times of inflation in my view

 

[Tysonboss1]

I enjoy your contributions Tysons and your arguments make a lot of sense (Doesn't mean I completely agree though). It is not like you can't maintain your capital and take an income from a savings account. I am earning 6.5% in a Ubank account, I can put enough back and still take a small income.

Yes I aggree that after Taxes and an allowance for inflation you are left with some cash to spend, However the problem is that it is only about 1% of the amount invested, So to earn $50,000 spending money you would need $5,000,000 Invested, and a couple of years of high inflation would wipeout 10 years of spending money.

 

[Tysonboss1]

Tyson
I make your grand mother around 125!!!

She may look it, But no she is in her mid 80's,

I think she may be turning 88, but I would have to confirm that with Dad, I don't really see her because she lives in NZ. But yeah 85 - 88 is probably correct because my dad is turn 59 and he is the yougest of 5 children.

 

[Tysonboss1]

. You can guarantee cheap oil will be gone, you can guarantee cheap fossil fuels will be gone, will we be spending the same percentage of income on the same house when energy costs will command a greater share?

I am not about to start speculating on the big macro stuff 20years into the future, Because the future is unknowable.

However if what you are saying about energy plays out, It would probably mean people would no longer be willing to make big commutes each day, and would pay a premium for living spaces close to the city, density would be on the increase and land prices in these areas would sky rocket.

But as i said who knows, we could just as easily avoid any such energy crisis and letting the worry of it affect your investments my well turn out badly for you.

 

[Agentm]

just came across this

updated article from steve keen at debtwatch



"So get used to it: mortgage debt drives house prices, and growth in mortgage debt is now ending. The recent falls in house prices are just the beginning."

 

[wayneL]

just came across this

updated article from steve keen at debtwatch



"So get used to it: mortgage debt drives house prices, and growth in mortgage debt is now ending. The recent falls in house prices are just the beginning."

It's been said hundreds of times - Credit is the ONLY fundamental.

 

[white_goodman]

It's been said hundreds of times - Credit is the ONLY fundamental.

this is true, watch the money supply, its a great indicator

 

[AlexG1]

I am not about to start speculating on the big macro stuff 20years into the future, Because the future is unknowable.

However if what you are saying about energy plays out, It would probably mean people would no longer be willing to make big commutes each day, and would pay a premium for living spaces close to the city, density would be on the increase and land prices in these areas would sky rocket.

But as i said who knows, we could just as easily avoid any such energy crisis and letting the worry of it affect your investments my well turn out badly for you.

Yes - for example another possible future scenario is that businesses decentralise (entirely possible right now in many cases - and happening in other cases). In this scenario people may choose to avoid the rat race and property prices in 'lifestyle' locations would skyrocket.

Alex

 

[trainspotter]

just came across this

updated article from steve keen at debtwatch

"So get used to it: mortgage debt drives house prices, and growth in mortgage debt is now ending. The recent falls in house prices are just the beginning."

Same guy walked to Mt. Kosciusko right? Geeeeeee ... fuggen legend.

I reckon it is going to rain soon. What are my chances of getting this right as well?

Steve Keen has called 5 of the last 3 downturns. Ripping stuff.

On one hand you have this ........... Banks made billions in profit.

The Commonwealth Bank of Australia's (The Group's) Net Profit After Tax ("NPAT") ("statutory basis") for the half year ended 31 December 2010 was $3,052 million, which represents an increase of 5 percent on the prior year. NPAT ("cash basis") for the half year was up 13 percent on the prior year to $3,335 million

ANZ - Underlying profit after tax climbed to $1.4 billion for the three months to December 31, 2010, a 27 per cent jump on the previous corresponding quarter as impaired assets continue falling.

The NAB reported $1.3 billion in unaudited cash profits for the three months to December 31 2010, which was just above market forecasts of $1.25 billion.

That's $200 million more than the $1.1 billion of 12 months ago and slightly higher than the $1.29 billion for the last quarter of its previous year.

Average Home Loan
The average loan size for all owner occupied housing commitments rose $600 to $287,300 between October and November 2010.

Average loans in each state/territory were (excluding refinancing):

NSW - $322,200
VIC - $318,000
QLD - $292,500
SA - $245,500
WA - $298,900
TAS - $203,500
NT - $306,800
ACT - $291,700

Non Performing Loans
Australian banks have one of the lowest non-performing loans ratios of all 97 surveyed economies. Only 1.2 per cent of Australian bank loans are ‘non-performing’, meaning that only a very small proportion of loan repayments have either ceased or are excessively late. This ratio was fairly steady at 0.2% three years rising to its current figure in 2009.

On the other hand you have this ......

Williams and Nason argue that the banking investment cycle is moving from the housing boom era of 1995 to 2010 to what they have named the "utility phase", which will kick in from 2012.

Thanks to nearly two decades of unbroken economic growth, the big banks grew fat on a home loan-led bonanza. During that period, the percentage of mortgages as a proportion of the majors' loan books rose from 25 per cent to 55 per cent. (Cause of concern to some)

http://www.smh.com.au/business/banks-reach-end-of-boomtime-stats-20100926-15sfk.html

But they end it with this "Either way, it's not all bad news on the investment front. Just don't expect to see overly generous shareholder returns in these credit-constrained times."

and this ...............

First, Australia is heavily leveraged to China, so any slow down in the Chinese economy would likely translate into lower prices for Australia's two largest exports - iron ore and coal - along with other commodites. Should commodity prices fall significantly, it follows that less money will flow into the Australian economy, resulting in lower spending, a contraction in aggregate demand, and higher unemployment. A slowdown of China's economy is highly probable since its two major export destinations - the US and Europe - are facing an extended period of sub-par economic growth from deleveraging as well as ageing populations. To date, China has undertaken massive government stimulus to subsidise production and consumption in order to maintain high growth rates. But as highlighted recently by Jim Chanos, such an approach inevitably produces vast amounts of waste and is unsustainable. Futher, there is evidence that China's housing market is a bubble waiting to burst, and has the potential to dramatically slow China's economy.

The second major risk for house prices is that world credit markets freeze, thereby dramatically increasing Australian banks' cost of wholesale funding and/or reducing their ability to raise funds offshore. Recent analyses by investment banks Credit Suisse and Goldman Sachs estimate that the Australian banks will need to raise between $100 billion and $170 billion of term wholesale debt in the 12 months to March 2011, of which about $78 billion would be the refinancing of existing borrowings that mature.

http://www.unconventionaleconomist.com/2010/09/australian-housing-bubble-in-search-of.html

Who is right and who is wrong?

This has all been done to death over several hundred pages so far.

Yes yes yes it is still possible to make money out of property. Yes yes yes people are gonna get burned. Yes yes yes I have seen it all before. Third cycle so far. Do your homework.

If you don't wanna own property, stay renting/living at home/boarding/house sitting/whatever and enjoy looking at the cash you have squirreled away in the bank. OR wait for the "crash" and pick up a bargain. Ooooooops ... too late.

 

[Tysonboss1]

1, How would you achieve this now and what is low debt?

2, The REIV now reports that the median house price in Melbourne for the Dec quarter was $600,000! Therefore, 80% leverage requires a $120,000 deposit at the median price. How long would it take the average wage earner to save $120k?

3, Is 80% low debt/leverage?

4, The property bubble is a debt bubble where many are living paycheck to paycheck to stay in their PPOR let alone buy an IP - a precariously balanced situation.

5, My sister bought a home right on the water in Hawaii (sure thing) and paid much less than the median at the time. Now it's worth 50% of what they paid (debt bubble + GFC) and they are essentially bankrupt in their fifties.

1, Over your life just spend less than you earn, Invest the savings and as you build wealth and you are starting to accumulate a large amount of wealth think about putting some into property at low or no debt when the rental returns a favourable compared to the purchase price. this will put you in good shape when you look at stop working because you will have a solid weekly income stream, offcourse you would still keep 50% of you funds in other investments.

2, well how long is a piese of string? It completely depends on their spending habits, But if the average wage is $64,000 and there is two people working they will probably be bring in $100K after tax, if they could could save $40,000 / year then it would take 3 years to save $120,000, less if you include investment earnings.

3, 80%lvr is high debt ratio

4, If they are living paycheck to pay check they are either living above their means or have a history of failing to save.

5. I can't comment on your sisters situation with out knowing the facts, For example did she purchase it with cash or on margin, was it for a ppor or an IP, If it was an IP how was she planning to make a profit from rental return over time or short term capital gain(gambling), Was the property considered high end or luxury these always suffer the biggest falls in the down turn and have the worst rental yield, so I steer well clear.