The future of Australian property prices

Tysonboss1 · 17 October 2012

All this is assuming that the interest rate is going to remain at it's current level

.

It's also assuming that house prices crash 25% and then sit there permanently

Granted that in the next few years it will remain here or lower. That's not to say that in 7 years time interest rates don't hit 10%+. Then what?

In seven years time you would have raised the rent 6 times, and you would have reduced the loan through 6 years of principle payments.

Not to mention that for interest rates to hit 10%, the RBA must be trying to calm rampant inflation, which would have put upward pressure on the capital value of the house and the rental income.

Rental yields don't move in tandem with interest rates

.

True, they tend to just go up. interest rate flucutate both up and down.

Sure if rates are higher so to is inflation usually

.

Yes, correct.

But if inflation got to out of hand land lords wouldn't be able to increase rent accordingly.

Inflation would be causing upward pressure on rents along with every things else.

McLovin · 17 October 2012

Tysonboss1 said:
there are two ways to look at property, One is as a place to live. I believe it is by far cheaper to Buy than it is to rent when you look at the long term picture of owning for say 40years compared to renting over a similar time frame.

Then there is investment.

Except potential buyers aren't faced with a binary decision of buy now or rent for the next 40 years...

Tysonboss1 said:
The same was probably true for the genius (your word) who bought 25 years ago, no doubt as rates hit 18% there was some pretty big mortgage stress.

Funnily enough interest payments as a % of income were lower with rates at 18% than they are with rates at 6%. The massive run up in debt would explain that. http://www.macrobusiness.com.au/201...e-affordability/screenhunter_07-oct-15-09-01/

Tysonboss1 said:
this is true, You will find though that I have never proposed people take on large amounts of debt to finance property, I always recommend low lvrs.

Easier said than done. Great once you're buying your third or fourth IP. But for the average family earning the median income with a couple of kids it's not really an option.

Tysonboss1 said:
But also, commiting yourself to rent that $300K house for the next 40 years means you are subjecting yourself to payments of upto $2,340,000 over that 40 years, The cost of owning that home comes no where near that amount, Plus you end up owning a house.

Again, the decision is not rent for 40 years or buy.

Bill M · 17 October 2012

A lot of discussion out there about renting or buying so I thought I'd share a true story. 23 years ago a good mate of mine said "Bill it's so expensive here in Manly, I will never be able to afford a house here." I said, take it easy start cheap, right now you can buy a bedsitter for 130k, buy it, pay it off and then move on to something bigger. He ignored me as they usually do, guess what? 23 years later he is still renting and is now paying $700 per week for a crappy house in a bad location. Had he have bought back then he would own that property by now. Buying will always pay off eventually. Paying rent when you are an old man is a mugs game.

Macquack · 17 October 2012

Bill M said:
A lot of discussion out there about renting or buying so I thought I'd share a true story. 23 years ago a good mate of mine said "Bill it's so expensive here in Manly, I will never be able to afford a house here." I said, take it easy start cheap, right now you can buy a bedsitter for 130k, buy it, pay it off and then move on to something bigger. He ignored me as they usually do, guess what? 23 years later he is still renting and is now paying $700 per week for a crappy house in a bad location. Had he have bought back then he would own that property by now. Buying will always pay off eventually. Paying rent when you are an old man is a mugs game.

You should advise your mate to move to the Central Coast.

Klogg · 17 October 2012

Bill M said:
A lot of discussion out there about renting or buying so I thought I'd share a true story. 23 years ago a good mate of mine said "Bill it's so expensive here in Manly, I will never be able to afford a house here." I said, take it easy start cheap, right now you can buy a bedsitter for 130k, buy it, pay it off and then move on to something bigger. He ignored me as they usually do, guess what? 23 years later he is still renting and is now paying $700 per week for a crappy house in a bad location. Had he have bought back then he would own that property by now. Buying will always pay off eventually. Paying rent when you are an old man is a mugs game.

I agree with you here to a degree. It is good to own an asset that is bound to go up with inflation (and cash does not). However, what if I could find assets that could get me a better return than I would get by buying the property I'm living in?

As far as I can tell, equities are far better value (yes, this is subjective, but to me they are) than residential property. Even if rent is 4-5% of the property, with your start-up (stamp duty, solicitors, etc), on-going costs, interest variations, and amount of equity committed, I think there's better elsewhere....

Overall, I'd say that if the argument were either buy a house or hold cash, I think the former will almost always win long term... but to think they're your only options is very narrow-minded.

Bill M · 17 October 2012

Macquack said:
You should advise your mate to move to the Central Coast.

He won't go as it's too far from his work. For me it doesn't matter, live rent free and don't work.

Tysonboss1 · 17 October 2012

Except potential buyers aren't faced with a binary decision of buy now or rent for the next 40 years...

I think they will be renting for 40 years if they are waiting for property p/e's to match current stock p'e's. I am not saying now is the ideal time to buy, But some people that post on this thread act like they are waiting for property to be trading on a pe of 10 before they buy.

Funnily enough interest payments as a % of income were lower with rates at 18% than they are with rates at 6%.

So there was no mortgage stress at that interest rate level, I was only young then, But I remember alot of people in my neighborhood having trouble finding work and quite a few people losing there houses. I honestly think it was worse then.

Easier said than done. Great once you're buying your third or fourth IP. But for the average family earning the median income with a couple of kids it's not really an option.

Obviously. thats part of the problem though. My generation has no problem earning enough money. But they don't save what they earn. I honestly believe the problem is two fold.

First problem - Most people expect to much for their first house, They want to start where their parents finished.

Second problem - they want to move into this dream home the second they decide to marry and have kids even though they have spent their early adult life back packing across europe or in thailand and spent all disposible income on fully sick cars and alcohol fueled nights out.

Again, the decision is not rent for 40 years or buy

Well, I think knowing that you will need a roof for the next 40 years, and it is likely to be your biggest living expense. Finding the best value option will have a deep impact on your life.

And understanding that what it cheapest in year 1, might night be best value over the 40years.

I mean if you focus on what is cheaper in year one, renting a car might seem the best option, But clearly if it were, there would not be companies renting out cars.

Tysonboss1 · 17 October 2012

Bill M said:
A lot of discussion out there about renting or buying so I thought I'd share a true story. 23 years ago a good mate of mine said "Bill it's so expensive here in Manly, I will never be able to afford a house here." I said, take it easy start cheap, right now you can buy a bedsitter for 130k, buy it, pay it off and then move on to something bigger. He ignored me as they usually do, guess what? 23 years later he is still renting and is now paying $700 per week for a crappy house in a bad location. Had he have bought back then he would own that property by now. Buying will always pay off eventually. Paying rent when you are an old man is a mugs game.

Julia · 17 October 2012

Tysonboss1 said:
Well yes and no,

When they original signed up for the loan at 7.99% interest, the total they had to pay over the life of the loan was $786,852.

With current interest rates the total amount they have to pay has dropped to $485,829, thats nearly 40% less.

So even if the 25% drop in house prices is permanent they are still much better off.

Your calculation assumes interest rates will remain at what is almost an 'emergency low'. They will not.

McLovin said:
I'm not disputing what you're saying I just think the return on property is pathetic and in no way commensurate with the risk, mainly because it has been sold as a safe path to wealth.

+1. I'm happy to own my own property but wouldn't in my wildest dreams be buying as an investment right now.

young-gun said:
All this is assuming that the interest rate is going to remain at it's current level. Granted that in the next few years it will remain here or lower. That's not to say that in 7 years time interest rates don't hit 10%+. Then what?

And, if property prices do not similarly move, what is mortgage stress now will become a total crisis.

McLovin said:
Funnily enough interest payments as a % of income were lower with rates at 18% than they are with rates at 6%.

You have to consider the whole situation as McLovin suggests.
At one stage I was paying 22% on IPs but generating rents and capital gain that rendered such an interest rate immaterial.

Tysonboss1 said:
First problem - Most people expect to much for their first house, They want to start where their parents finished.

True enough. Young people these days expect their first home to have five bedrooms, three bathrooms, three living areas, a media room and a pool.
Solution: change your ideas, kids. Get real.

Second problem - they want to move into this dream home the second they decide to marry and have kids even though they have spent their early adult life back packing across europe or in thailand and spent all disposible income on fully sick cars and alcohol fueled nights out.

Again true. "Having it all" seems to be the dream. Reality is a bit different.

Tysonboss1 · 17 October 2012

I agree with you here to a degree. It is good to own an asset that is bound to go up with inflation (and cash does not). However, what if I could find assets that could get me a better return than I would get by buying the property I'm living in?

Thats great, go for the assets with the higher return. But be sure that the higher return is set in stone, and you are as good at capital allocation as you think you are. and that you have the self control to never spend those extra returns along the way, or stop saving the savings your getting by renting.

As far as I can tell, equities are far better value than residential property.

Yes, alot of equites are, hence why I have exposure to a couple of million dollars worth of equities. But I still love my property investments, they are a great counter balance, and to know that no matter what happens to my business of other investments I can live in my house rent free and have a couple of other properties generating cashflow gives me great comfort.

but to think they're your only options is very narrow-minded

.

They are not your only options, but owning some property, Atleast one that you live in or that offsets the one you live in is a good idea in my mind. Timing of purchase is another arguement though, but when judging the correct time to buy, be sure to measure apples against apples.

Tysonboss1 · 17 October 2012

Julia said:
Your calculation assumes interest rates will remain at what is almost an 'emergency low'. They will not.

Yes it does, but only in the same sense that your calculation assumes that the house price decline of 25% remains as a permanent feature and the is never a recovery or any inflation.

In one very real aspect, the interest rate decline is producing real bankable savings, that will make permanent reductions in the loan amount.

The decline of prices may quite well be shorterm in nature and produce no long term change in situation.

And a 5.7%interest rate is not really an emergency low, when compared to say the Usa home loan rates of 2%.

Julia · 17 October 2012

Tysonboss1 said:
Yes it does, but only in the same sense that your calculation assumes that the house price decline of 25% remains as a permanent feature and the is never a recovery or any inflation.

Fair enough, but if you think prices will return to previous highs in, say, less than ten years, are you saying there was never any unreasonable increase in house prices, i.e. a bubble, largely spurred by initially the subprime loans in the US and what we now know to have been a not too dissimilar process in low doc loans here, plus various government grants to push people into buying real estate?
In other words, do you disagree that now we are seeing a return to more realistic housing prices and that these could fall further?

And a 5.7%interest rate is not really an emergency low, when compared to say the Usa home loan rates of 2%.

It's not realistic to compare our interest rates here with those in the US whose whole situation is markedly different to that in Australia. What is realistic is to look at lows and highs of interest rates in this country.

Ves · 17 October 2012

Julia, I love how you're an absolutely fundamentalist in terms of housing prices, but an avid trend-follower when talking about stocks "ie. the market price is always right". It's an interesting mix, and I mean no disrespect when I say that!

Julia · 17 October 2012

Ves said:
Julia, I love how you're an absolutely fundamentalist in terms of housing prices, but an avid trend-follower when talking about stocks "ie. the market price is always right". It's an interesting mix, and I mean no disrespect when I say that!

I'd never thought of it in those terms, Ves. Interesting observation.
I'm guessing, though, about the real estate situation, rather than necessarily being convinced about the bubble and the bursting of it.
Possibly even just a bit bored and alleviating this with provoking further discussion.

Tysonboss1 · 17 October 2012

Fair enough, but if you think prices will return to previous highs in, say, less than ten years, are you saying there was never any unreasonable increase in house prices,

No, I think houses did hit prices that were to high. However the fair value of a house is not as low as some here would like to think. And yes, I believe houses have the same chance of hitting recent highs as interest rates do of hitting recent highs.

I actually think that lower interest rates are more probable than, cheaper hosuing prices.

a bubble, largely spurred by initially the subprime loans in the US and what we now know to have been a not too dissimilar process in low doc loans here

,

The loc doc situation here is nothing like the subprime loan situation. As a business owner myself, Low doc loans have been helpful to me in the past, and they are much different from the sub prime.

plus various government grants to push people into buying real estate?

I have never been a fan of the government grants.

If you want banana's to be more affordable giving a certain element of the population more money to pay for the bananas will not make them more affordable. I believe helping developers build more stock and sub divide more land is the way to reduce prices ie. reduce red tape.

In other words, do you disagree that now we are seeing a return to more realistic housing prices and that these could fall further?

Prices of any asset class can fall further, What is worth discussing is the multiple of earnings you should pay for a good property.

Due to the stablity of cashflow a property produces and the tax advantages I am happy to pay 20 - 25 times earnings, most property in the area I invest is not far above this, Offcourse I want it to drop though.

It's not realistic to compare our interest rates here with those in the US whose whole situation is markedly different to that in Australia. What is realistic is to look at lows and highs of interest rates in this country

Well, yes it is different.

But I think our economy is maturing to the stage where interest rates will be lower for longer, I think will will stay near 3% for longer than we stay near 12% in the next 10 years.

But that's just my prediction, I don't have a crystal ball.

Tysonboss1 · 17 October 2012

Ves said:
Julia, I love how you're an absolutely fundamentalist in terms of housing prices, but an avid trend-follower when talking about stocks "ie. the market price is always right". It's an interesting mix, and I mean no disrespect when I say that!

That's funny you say that.

I consider my self a fundamentalist.

But I see julia in this situation as following a trend, ie " house prices have come down, so they must be on the way lower"

Tysonboss1 · 17 October 2012

Julia said:
Possibly even just a bit bored and alleviating this with provoking further discussion.

Thats it,

no more long winded answers for you

Julia · 17 October 2012

Tysonboss1 said:
Thats it,

no more long winded answers for you

Sorry, Tyson. I'll stop it and just leave you with some pretty sensible comments from Robert Gottliebson.
http://www.businessspectator.com.au...ent=118496&utm_campaign=kgb&modapt=commentary

Tysonboss1 · 17 October 2012

Julia said:
Sorry, Tyson. I'll stop it and just leave you with some pretty sensible comments from Robert Gottliebson.
http://www.businessspectator.com.au...ent=118496&utm_campaign=kgb&modapt=commentary

:

McLovin · 18 October 2012

Tysonboss1 said:
I think they will be renting for 40 years if they are waiting for property p/e's to match current stock p'e's. I am not saying now is the ideal time to buy, But some people that post on this thread act like they are waiting for property to be trading on a pe of 10 before they buy.

I don't think your average home buyer ever compares house prices to stock PE's.

Tysonboss1 said:
So there was no mortgage stress at that interest rate level, I was only young then, But I remember alot of people in my neighborhood having trouble finding work and quite a few people losing there houses. I honestly think it was worse then.

I don't know if there was mortgage stress only that as a % of disposable income people were spending less on interest then than now. That's a pretty worrying statistic, that we have ended up over 20 years spending more on home mortgage interest even though rates have fallen by 2/3rds. How can that possibly be sustainable? It's even worse when you think about the growth in real wages without productivity growth and the fact that we have come to the end of a 30 year credit boom.

Tysonboss1 said:
Well, I think knowing that you will need a roof for the next 40 years, and it is likely to be your biggest living expense. Finding the best value option will have a deep impact on your life.

It seems fewer and fewer people think that way. The risks just don't outweigh the benefits at the moment.

The future of Australian property prices

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