The future of Australian property prices

Taltan · 5 September 2011

Just thought I would chuck in some food fro thought

1. Two tax events in 1999 & 2000 helped lead to the great property boom. One was discounted on CGT such that everyone earning a decent wage and paying an accountant had the incentive to turn their profits into Capital. Labor partially reduced this practice in 2010 which has contributed to the recent downturn.

Secondly the GST imposed an extra 10% on all new dwellings whilst living existing dwellings untouched. As a result a supply shortage was created as every existing property favours a new one by 10%

These events are only now fully factored into the system and along with FHOG are why even if all else was equal the next 10 years will not be as good as the last

2. Property always seems to be measure by Median price but where is the consideration of improvements (which cost time and money)? What should really be measured and is not is the price of untouched dwellings. RP Data includes properties bought and redone (developers or DIY) and compares them to shares or term deposits.

However some people work considerable hours improving their property and thus increasing median prices. Its like comparing the returns on an savings account whilst adding the additional savings contributed.

In other words if RP Data says the median has fallen 4%, in actual fact I bet the median for untouched properties has fallen 5-6% whilst those where DIY improvements have been undertaken have risen in price.

medicowallet · 5 September 2011

Oh I agree entirely, but, more importantly:

Where is ROBOTS??

I think that I have seen him off, and he is having a suck on a damp cloth with Mr Burns.

Tysonboss1 · 5 September 2011

Taltan said:
2. Property always seems to be measure by Median price but where is the consideration of improvements (which cost time and money)? What should really be measured and is not is the price of untouched dwellings. RP Data includes properties bought and redone (developers or DIY) and compares them to shares or term deposits.

However some people work considerable hours improving their property and thus increasing median prices. Its like comparing the returns on an savings account whilst adding the additional savings contributed.

In other words if RP Data says the median has fallen 4%, in actual fact I bet the median for untouched properties has fallen 5-6% whilst those where DIY improvements have been undertaken have risen in price.

I don't aggree, for two main reasons.

1, The median figure is taken over a large portion of homes, and for every home that is renovated multiple others would have been depreatiating.

2, Renovations and maintance, over time would be funded through the rental return, which is not at all factored in by people simly looking at RP Data.

If you wanted a true picture of how a property performs as an investment, you would need to calculate the rental return it generates over time, minus any maintance of improvement work done, this would give you a real terms cashflow which you would add to the sale price.

Tysonboss1 · 5 September 2011

medicowallet said:
Where is ROBOTS??

He said months ago he was not posting here any more.

Taltan · 5 September 2011

Tysonboss1 said:
I don't aggree, for two main reasons.

1, The median figure is taken over a large portion of homes, and for every home that is renovated multiple others would have been depreatiating.

2, Renovations and maintance, over time would be funded through the rental return, which is not at all factored in by people simly looking at RP Data.

1. Of course buildings depreciate just like land appreciates but this is taken into consideration by the purchaser and vendor at any given point which is why both are in the median price and is irrelevant when comparing on-going prices.

2. Rental returns are like dividends - the yield on capital tied up in holding the asset. The ASX index excludes dividends and so rightly RP Data excludes rent.

How renovations are funded is irrelevant, rather over time money and labour is put into existing properties which increases the median price from one month to the next.

To put it differently lets say every 2nd Saturday all a bank's shareholders went in to work for the bank and in return increased the value of their specific shares. Such input would not be measured by the ASX Index.

There is an extra cost in property (renovations) v shares that is not considered when comparing a rolling index of prices.

Tysonboss1 · 5 September 2011

Taltan said:
1. Of course buildings depreciate just like land appreciates but this is taken into consideration by the purchaser and vendor at any given point which is why both are in the median price and is irrelevant when comparing on-going prices.

2. Rental returns are like dividends - the yield on capital tied up in holding the asset. The ASX index excludes dividends and so rightly RP Data excludes rent.

How renovations are funded is irrelevant, rather over time money and labour is put into existing properties which increases the median price from one month to the next.

To put it differently lets say every 2nd Saturday all a bank's shareholders went in to work for the bank and in return increased the value of their specific shares. Such input would not be measured by the ASX Index.

There is an extra cost in property (renovations) v shares that is not considered when comparing a rolling index of prices.

Thats my point though,

No doubt updating a 20 year old kitchen increases the property value, But what I am saying is that it wouldn't increase the median or average property value because over that year there would be 20 other properties whose kitchens all aged 1 year and hence lowered the average.

In regards to comparing to shares, All the companies on the ASX own assets which like a House are constantly wearing out and needing replacing, this is funded through the revenue of the business and deducted from earnings, so it reduces the free cashflow available to pay as dividends, Property is no different, the maintaince etc is deducted from the rental revenue,

Taltan · 5 September 2011

Tysonboss1 said:
Thats my point though,

No doubt updating a 20 year old kitchen increases the property value, But what I am saying is that it wouldn't increase the median or average property value because over that year there would be 20 other properties whose kitchens all aged 1 year and hence lowered the average.

In regards to comparing to shares, All the companies on the ASX own assets which like a House are constantly wearing out and needing replacing, this is funded through the revenue of the business and deducted from earnings, so it reduces the free cashflow available to pay as dividends, Property is no different, the maintaince etc is deducted from the rental revenue,

Let me put it this way, If you are a passive property investor than over time your property (all else being equal) will do worse than the median prices RP Data collects because you are doing nothing compared to those putting in new kitchens. I assume you agree.

However if you are a passive share investor (all else being equal) you should do as well as the market because everyone is a passive investor.

In other words part of the value added to property comes not from asset appreciation but from the injection of labour (e.g. weekend DIY) and capital (buy new sink for kitchen).

It has nothing to do with funding we are talking about value, not cash flows or funding.

Tysonboss1 · 5 September 2011

Taltan said:
Let me put it this way, If you are a passive property investor than over time your property (all else being equal) will do worse than the median prices RP Data collects because you are doing nothing compared to those putting in new kitchens. I assume you agree.

.

Yes, If you rented out a house and spent nothing on maintaince over time the value of you property would be worth less than those who did conducted maintaince.

But that is the same as any other business, you could compare that to,

Woolworths - not reinvesting money back into refreshing their stores with new signage, paint and floor coverings.

or,

Toll - Not reinvesting funds back into maintaining their trucks and warehouses

or,

APA - not spending money to maintain their gas pipelines and power stations.

All businesses reinvest part of their cash flows back into "staying in business" capital expenditure,

When the asx says a certain index has increased X% in the last 10years, they have only increased in value because over those years money has been spent by the companies making up that index so they can stay in business and remain profitable.

If the companies did not have stay in business capex spending, the index would not have increased in value, same goes for property.

Taltan · 5 September 2011

All right one last try, you buy a property in 2011 for $500,000 - old house nearly all land value. You demolish, build a new house and sell the entire block for $1,000,000 in 2012. If you had the only transactions in 2011 and 2012 RP Data would report a 100% increase in house prices - do you see a distortion that does not occur with shares?

Tysonboss1 · 5 September 2011

Taltan said:
All right one last try, you buy a property in 2011 for $500,000 - old house nearly all land value. You demolish, build a new house and sell the entire block for $1,000,000 in 2012. If you had the only transactions in 2011 and 2012 RP Data would report a 100% increase in house prices - do you see a distortion that does not occur with shares?

Ok, one last try,

Yes, if that were the only transaction to occur.

How ever, over the space of that year it would not be the only house sold, another 50 un renovated houses would sell also and the depreation that those 50 houses suffered that would offset the one full reconstruction.

Property Investments would hold value much better than just about any asx company if you stopped spending the stay in business capital expenditure.

If I said I was going to conduct zero maintance over the next 12 months I would still beagle to charge rent, and the house would probably still keep pace with the index.

If qantas said the same thing within 14 days they would planes falling out the sky and their share price falling with it.

Junior · 6 September 2011

Let me try.

Say, for example, in a given year the median property price is reported to have increased by 10%, and the ASX200 index is reported to have grown by 10% as well.

In that particular year shares would have effectively outperformed property, as shares have zero ongoing holding costs, whereas property has associated holding costs borne by the owner which include capital and labour contributed towards maintenance, repairs, renovations etc.

These ongoing contributions of capital and labour have the effect of boosting the median house price, as this median figure does not factor in these costs.

So where the owner of a property has to contribute capital and labour towards his investment, the owner of shares has no such contribution to maintain his/her investment.

Therefore in this example, where the reported median house price shows an increase of 10%, and the ASX200 shows an increase of 10%, as an asset class equities have outperformed.

Tysonboss1 · 6 September 2011

Junior said:
Let me try.

Say, for example, in a given year the median property price is reported to have increased by 10%, and the ASX200 index is reported to have grown by 10% as well.

In that particular year shares would have effectively outperformed property, as shares have zero ongoing holding costs, whereas property has associated holding costs borne by the owner which include capital and labour contributed towards maintenance, repairs, renovations etc.

These ongoing contributions of capital and labour have the effect of boosting the median house price, as this median figure does not factor in these costs.

So where the owner of a property has to contribute capital and labour towards his investment, the owner of shares has no such contribution to maintain his/her investment.

Therefore in this example, where the reported median house price shows an increase of 10%, and the ASX200 shows an increase of 10%, as an asset class equities have outperformed.

Ok, try and understand.

If I by a house that is in good condition debt free, I never, ever have to add more capital in, it is exactly the same as owning a share.

All maintaince and holding costs would be covered by the rental return, in the same way as woolworths covers their maintiance from their cashflow.

When you say a your share has increased without the need for capital expenditure this is untrue, your managers have used your "share holder funds" to conduct stay in business maintaince for you in the same way a property manager will use some of your rental return to conduct the maintaince.

investorpaul · 6 September 2011

Tysonboss1 said:
Ok, try and understand.

If I by a house that is in good condition debt free, I never, ever have to add more capital in, it is exactly the same as owning a share.

All maintaince and holding costs would be covered by the rental return, in the same way as woolworths covers their maintiance from their cashflow.

When you say a your share has increased without the need for capital expenditure this is untrue, your managers have used your "share holder funds" to conduct stay in business maintaince for you in the same way a property manager will use some of your rental return to conduct the maintaince.

I get what you mean when you say that the company in which you invest uses some of their cash to pay for maintenance of their business/assets/etc. But:

With a share you get a dividend (lets say its 5%) you don't have to pay any of that towards "repairs and maintenace".

With a house you get rent (lets assume its 5% again) you do have to pay for repairs and maintenace.

Junior · 6 September 2011

Tysonboss1 said:
Ok, try and understand.

If I by a house that is in good condition debt free, I never, ever have to add more capital in, it is exactly the same as owning a share.

All maintaince and holding costs would be covered by the rental return, in the same way as woolworths covers their maintiance from their cashflow.

When you say a your share has increased without the need for capital expenditure this is untrue, your managers have used your "share holder funds" to conduct stay in business maintaince for you in the same way a property manager will use some of your rental return to conduct the maintaince.

This is going around in circles.

Just to clarify: We are talking about comparing stock indices and median house prices. This often occurs as investors compare asset classes and asset class performance.

- The median house price includes a proportion of properties whereby the owners have outlayed large amounts of capital to completely rebuild the properties or conduct major renovations in order to increase the value of their investment.

- A share price index tracks the price of shares, whereby none of those shareholders/investors have outlayed any major sums of capital to increase the value of their investment.

Hence the two are not comparable, and a house price index is an overstatement of returns achieved by that asset class.

Tysonboss1 · 6 September 2011

investorpaul said:
With a share you get a dividend (lets say its 5%) you don't have to pay any of that towards "repairs and maintenace".

With a house you get rent (lets assume its 5% again) you do have to pay for repairs and maintenace.

Company - takes in revenue pays costs and maintaince and then pays a dividend from the free cash flow left over.

House - takes in revenue pays costs and maintaince and then land lord can spend free cash flow left over.

It's the same.

Tysonboss1 · 6 September 2011

Junior said:
1, The median house price includes a proportion of properties whereby the owners have outlayed large amounts of capital to completely rebuild the properties or conduct major renovations in order to increase the value of their investment.

2, - A share price index tracks the price of shares, whereby none of those shareholders/investors have outlayed any major sums of capital to increase the value of their investment.

1, what and BHP hasn't used shareholder funds to expand into new mines, undate equipment etc etc.

2, The share holder owns all of the companies profit and cash at bank, when BHP's managers decides to replace 50 trucks with new ones because the old ones are worn out, they take that money from BHP's bank account, there fore reducing the amount that can be paid as a dividend that year. it is the same as a property manager deciding I need a freah coat of paint and they pay a painter $1000 that they deduct from my rental check that month.

Tysonboss1 · 6 September 2011

As I said before,

A land lord if he holds they property debt free, Never has to inject any capital or lift a hammer ever again unless he wants to.

For example if I own a house earning $400 a week rent, I can just let that rent ( sales revenue) build up in a bank account and at the end of the year I would have $20,800, from that some rates and insurance charges be paid $3000, put $4000 aside for future maintaince and pay a $14,800 dividend.

$20,800 sales revenue
- $ 3,000 rates and insurance
- $ 4,000 Future capex allowance
- $14,800 dividend to owner

Notice the owner allowed for future capex and still paid a dividend to himself, the property has not required him to inject any further funds or labour.

This is exactly the same as a company listed on the asx.

craft · 6 September 2011

Tysonboss1 said:
As I said before,

A land lord if he holds they property debt free, Never has to inject any capital or lift a hammer ever again unless he wants to.

For example if I own a house earning $400 a week rent, I can just let that rent ( sales revenue) build up in a bank account and at the end of the year I would have $20,800, from that some rates and insurance charges be paid $3000, put $4000 aside for future maintaince and pay a $14,800 dividend.

$20,800 sales revenue
- $ 3,000 rates and insurance
- $ 4,000 Future capex allowance
- $14,800 dividend to owner

Notice the owner allowed for future capex and still paid a dividend to himself, the property has not required him to inject any further funds or labour.

This is exactly the same as a company listed on the asx.

A dividend return is net of capital expenditure for growth.

As well as the median house price picking up maintenance expenditure it also picks up capital expenditure for quality improvements. We used to be content with modest now we build McMansions.

If you are to include the return from capital expenditure arising from quality improvements captured by median house price then there should be a deduction from your gross yield of not only maintenance costs but a notional expense for capital improvement as well.

Tysonboss1 · 6 September 2011

craft said:
If you are to include the return from capital expenditure arising from quality improvements captured by median house price then there should be a deduction from your gross yield of not only maintenance costs but a notional expense for capital improvement as well.

In the little 2 min example I put together, I allowed for $4000 to be set aside a year for future capex including any quality improvements the land lord wanted in future years.

craft · 6 September 2011

Tysonboss1 said:
In the little 2 min example I put together, I allowed for $4000 to be set aside a year for future capex including any quality improvements the land lord wanted in future years.

Tysonboss1 said:
put $4000 aside for future maintaince .

Read to me that you had only allowed for future maintenance. Allowing for the notional cost of the capital improvement included in the median house price measure is very important if you are not to overestimate your return and is the essence of the current discussion.

Do you think $4000 (on $20,800 gross yield) is a fair estimation for both maintenance expense and to improve the quality of the property in line with the rate of quality improvement in the median house?

The future of Australian property prices

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