The future of Australian property prices

[maffu]

For the record the median income for greater Sydney area was ~$75K. While higher than the national average, it is not by what people might think.

Good find.

So the median household income of Australia is about 64k, while the median household income of Sydney is 75k.
The median household income in Melbourne is 67k.

From a news article:
''The multiple between the median house price ($567,000) and median household income ($67,700) in Melbourne was 8.4. Sydney's multiple was 9.2.''

Nearly 10 years of a double income to pay off a median house in Sydney is a pretty massive chunk. I can only imagine these metrics will ease into the future. Especially in times when we have a recession. Considering we have not had a recession for so long, I highly doubt house prices will stay so high if we have a proper recession.

 

[FlyingFox]

Nearly 10 years of a double income to pay off a median house in Sydney is a pretty massive chunk.

10 years if every single cent goes to your mortgage. 30 if your good with your mortgage; probably without much more savings for retirement.

 

[againsthegrain]

10 years if every single cent goes to your mortgage. 30 if your good with your mortgage; probably without much more savings for retirement.

I know a few couples that bought it way over their heads, the above scenario they could only wish for. Its just amazing that at the moment those people say things like "ahh I dont' want to think about it" being in mid 20s to late 20s and facing 30+ years of repayments "if nothing goes wrong scenario" must have not sank in yet... but it will sooner or later already sitting on a loss faced with falling prices, increased living expenses and more unsecure jobs its only a matter of time before one decides to cut their loses and add to the oversupply

 

[FlyingFox]

I know a few couples that bought it way over their heads, the above scenario they could only wish for. Its just amazing that at the moment those people say things like "ahh I dont' want to think about it" being in mid 20s to late 20s and facing 30+ years of repayments "if nothing goes wrong scenario" must have not sank in yet... but it will sooner or later already sitting on a loss faced with falling prices, increased living expenses and more unsecure jobs its only a matter of time before one decides to cut their loses and add to the oversupply

True. Also difficult to say what other social and economic issues prop up due to this.

 

[sptrawler]

Well I haven't posted on here for quite a while, last time I was expecting a bust.
I can only talk from my immediate location, however things have gone bang again. Same for same properties, in the street I live in have jumped $100k in the last 12 months.
Actually it has screamed up recently, I tend to wonder if it is not the double whammy of dropping interest rates and the relaxing of the rules regarding SMSF buying residential property.
I really can't see how this won't all end in tears.

 

[glen rosa]

You guys have got to stop boasting this old school mentality. How is having a mortgage for hundreds of thousands of dollars on what should be considered a LIABILITY a good idea? Everyone should be preaching to buy an investment property from the get go(obviously pick your timing). You pay rent for 300$ a week, have all the benefits of a cashflow positive property(not my fault if some idiots choose to negative gear) including the ability to write things off against the house, all the while paying down the mortgage far quicker than if you lived there forking it all out yourself?

House prices stagnant to down.

So given this idea - i wonder what the future of rental prices is in Australia... I know there is a debate about whether house prices are going down or not - but does anyone know what happened to rental prices in places where the property market actually has tanked (USA, Japan...??) Have rents dropped to the same extent? or not?

thanks

 

[FlyingFox]

So given this idea - i wonder what the future of rental prices is in Australia... I know there is a debate about whether house prices are going down or not - but does anyone know what happened to rental prices in places where the property market actually has tanked (USA, Japan...??) Have rents dropped to the same extent? or not?

thanks

Good question. No idea. I assume they would drop as well. However the it would depend on the situation to start with. What were the rental yields to start with? They're very low here. I would almost expect rents to rise here even with falling prices. Investors have to compensate for the loss of capital growth, principal etc.

Edit: If they really drop like parts of the US, Ireland etc than all bets are off I guess.

 

[sydboy007]

In the US rental yields dropped in places where the over investment of housing occurred the most - Florida was prob the worst affected.

From reading about a few vulture property funds that have built up portfolios of distressed housing in the US it seems that as the lending criteria has become quite strict it had been a lot harder for renters to get a loan to by a house, which seemed to provide a level of support for rents.

The way I see it to make housing a decent investment you have to factor in

loan interest rates + holding costs - rental income - generally a negative value

you then need to factor in what kind of return the extra money you funnel into the loan could generate - I'd argue it's still relatively easy to get a 6% fully franked dividend yield in the market.

I'll use my house as an example since the area I live is the one I have the best understanding of.

I'll be conservative and say my house is worth 800K (more likely 850)

You will borrow only 80% = 640K at 5.4% (seems a reasonable level at present)

3BR house with car space and small courtyard in Erskineville will get around $770 / week rent

Rental income = 40040

Annual interest = 34560

Council Rates = 1100

Water = 1050

Insurance = 500

Real Estate Agent Fees = 5% of 40040 = 2000

Net Total = 830

I would say this is biased to making the property look good as if it was bought as n IP then I would assume there's land tax and stamp duty involved too.

I compare this to 180K in shares providing a 6% fully franked dividend

Grossed up Dividend = 15428

Both have the risk / reward of capital growth as well.

 

[FlyingFox]

...

Real Estate Agent Fees = 5% of 40040 = 2000
....

Can't speak for Sydney but the usual agents fees in Brisbane was around 7-9%. With the lower end usually reserved for clients with multiple IP's under management. I think it is similar in Melbourne but please correct me as I am new to Melbourne.

 

[Julia]

Council Rates = 1100

Really? So cheap? I pay around $3000

Insurance = 500

Again, unbelievably cheap. Is this factual?
I have just paid $1079

 

[explod]

Can't speak for Sydney but the usual agents fees in Brisbane was around 7-9%. With the lower end usually reserved for clients with multiple IP's under management. I think it is similar in Melbourne but please correct me as I am new to Melbourne.

Unbelievable, usual rates down south 3 to 2.5% Sold a block through Property Shop (all online with just a sign on the block) at 1% fee in 2005

My Uncle was a Real Estate Agent for about 30 years on the Gold Coast, no wonder he did well.

 

[FlyingFox]

Unbelievable, usual rates down south 3 to 2.5% Sold a block through Property Shop (all online with just a sign on the block) at 1% fee in 2005

My Uncle was a Real Estate Agent for about 30 years on the Gold Coast, no wonder he did well.

I was referring to management fees not selling fee. I don't know what those are/were.

 

[KurwaJegoMac]

property management fees are higher:7-8%

Similar to Julia, I paid about $1100 for insurance

You also need to budget for maintenance and repairs/replacements

You may also need to consider ongoing bank fees and land tax

Edit: i would also assume rentals for 50 weeks per year to account for transitions between tenant as well as signing your first one

Also you need to compare apples with apples. You're comparing the cashflow of an ungeared investment vs a very heavily geared one. Of course the ungeared one will give you better cashflow

 

[young-gun]

So given this idea - i wonder what the future of rental prices is in Australia... I know there is a debate about whether house prices are going down or not - but does anyone know what happened to rental prices in places where the property market actually has tanked (USA, Japan...??) Have rents dropped to the same extent? or not?

thanks

It depends on the severity of the correction/crash/armageddon. If it is bad enough ie to the point of mass foreclosures then rents will take off. From what I have read and understand rents in alot of places have gone gangbusters. Reason being alot of Ip's foreclosed on, young people finally wake up and see owning your own home isn't all it's cracked up to be, so no one wants to buy. With less rentals on the market, and an increase in demand from those that are scared of getting burnt on their first purchase, or anyone who doesn't want to get burnt again, go into rentals. Less supplym more demand, rent heats up. JMO

 

[young-gun]

Can't speak for Sydney but the usual agents fees in Brisbane was around 7-9%. With the lower end usually reserved for clients with multiple IP's under management. I think it is similar in Melbourne but please correct me as I am new to Melbourne.

Unbelievable, usual rates down south 3 to 2.5% Sold a block through Property Shop (all online with just a sign on the block) at 1% fee in 2005

My Uncle was a Real Estate Agent for about 30 years on the Gold Coast, no wonder he did well.

I could be wrong here but it appears fox is referring to property managers where plod you are referring to real estate agents.

 

[Bill M]

Can't speak for Sydney but the usual agents fees in Brisbane was around 7-9%. With the lower end usually reserved for clients with multiple IP's under management. I think it is similar in Melbourne but please correct me as I am new to Melbourne.

I pay 6.6% which includes GST to my Agent in Sydney.

Council Rates = 1100

Really? So cheap? I pay around $3000

I pay $1,100 for a Unit in Warringah Shire Council. I don't know what it would be for a house there.

Insurance = 500

Again, unbelievably cheap. Is this factual?
I have just paid $1079

On my rental property I only pay $371 for Landlords Insurance. The building Insurance is covered by the Body Corporate as a one policy for the whole building and that comes out of the levies raised.

Just to be on a level playing field, I should mention the levies/strata fees on my unit is close to $4,000 per year. That is the biggest expense.

 

[Mrmagoo]

In the US rental yields dropped in places where the over investment of housing occurred the most - Florida was prob the worst affected.

From reading about a few vulture property funds that have built up portfolios of distressed housing in the US it seems that as the lending criteria has become quite strict it had been a lot harder for renters to get a loan to by a house, which seemed to provide a level of support for rents.

The way I see it to make housing a decent investment you have to factor in

loan interest rates + holding costs - rental income - generally a negative value

you then need to factor in what kind of return the extra money you funnel into the loan could generate - I'd argue it's still relatively easy to get a 6% fully franked dividend yield in the market.

I'll use my house as an example since the area I live is the one I have the best understanding of.

I'll be conservative and say my house is worth 800K (more likely 850)

You will borrow only 80% = 640K at 5.4% (seems a reasonable level at present)

3BR house with car space and small courtyard in Erskineville will get around $770 / week rent

Rental income = 40040

Annual interest = 34560

Council Rates = 1100

Water = 1050

Insurance = 500

Real Estate Agent Fees = 5% of 40040 = 2000

Net Total = 830

I would say this is biased to making the property look good as if it was bought as n IP then I would assume there's land tax and stamp duty involved too.

I compare this to 180K in shares providing a 6% fully franked dividend

Grossed up Dividend = 15428

Both have the risk / reward of capital growth as well.

Not to mention the 200k you had to drop..

 

[sptrawler]

I pay 6.6% which includes GST to my Agent in Sydney.

.

In Perth the Agents cost to manage a rental, tends to be around 12% if compulsory inspections are included.

 

[Bill M]

In Perth the Agents cost to manage a rental, tends to be around 12% if compulsory inspections are included.

That seems way over the top. In my case the Agent handles hundreds of rentals in the same area. It's all medium to high density unit blocks. They have multiple units in one block, I would think the volume brings the prices down. They do 3 Monthly inspections with photo reports as well.

 

[psailagroup]

What also turns me off from property these days is when you buy a house you have a beutifall thing called stamp duty, 5% of purchase price and of you borrow more then 80% lenders mortguage insurance kicks in as well
So glad that I sold my two IP two years ago...