The future of Australian property prices

[odds-on]

Lol
The true special person is the one who runs with the herd, and turns before the edge of the cliff, which is why over the last couple of years I was always asking A/Prof when he thought it was going to end. If I could have my time over again, THIS is what I would be trying to learn, is the psychology around the herd mentality of investing, and how to spot the initial turning points with greater accuracy (as most people who have been investing successfully for at least 15-20 years can probably see some signs earlier than the people whose money they will be receiving)
MW

Hi MW,

Have you read "The Big Short" by Michael Lewis? It is an absolutely fascinating account about the guys who went against the herd. The psychological strains on Paulson and Burry were intense as they waited for their bets to come right.

Cheers

 

[moXJO]

Hi Tech/A,

Do you think it was a once in a lifetime opportunity for your generation?

Cheers

Theres more opportunity now to make a buck then before (not talking just about property). And a lot of it is in industries that are fairly new. You guys are not snoozing through it?

 

[young-gun]

Just rememberr the signs for when it happens again in our lifetime.

I'll be too old to give a damn but you younger ones may well get on it!

Tech I know you have read dents great crash ahead. What's your take on demographics fuelling credit demand and markets. If i recall correctly dent is predicting the next boom early to mid 20's. this being the time for gen y to start entering into their spending/housing/upgrading years. I tend to agree with him.

 

[Knobby22]

With the dollar falling, inflation will rise.
I think we may get one more cut in interest rates at best. I can see it going the other way soon after.

 

[sydboy007]

If you accept the premise that the rise in house prices since 2002 was driven primarily by a large rise in household debt facilitated by loose lending standards by banks competing for market share then yes, the party ended about 2 years ago now.

Now that the end of massive intervention by central banks to keep interest rates artifically low is winding down, it's seems quite likely that there will be downward pressure on house prices from here. The RBA lowering interest rates may cushsion the market for a time but there is clearly a reluctance to lower rates much further.

Rates could still go down a lot further. I think the RBA may just change the capital risk weighting against property so as to not spark a big lending boom.

So far commodities have remained stagnant with the rise of the USD, so I don't think inflation is going to increase too badly. There's so much over capacity int he world that there's no pricing power for most products, so that should also work to inhibit too much inflation being imported.

I received an email yesterday for a 2 level 1 BR apartment in ultimo sydney. Asking price $435K current weekly rent $430

initially I though not bad:

Annual Yield: 22360 / 435 000 ~ 5.1%

Then I thought you need to take out - yearly council rates $800, water $700, landlord insurance $700, strata $2500

Annual yield (22360 - 4700) / 435000 = 4%

Then you'd also need to take out any management fees if you don't want to do that yourself.

I can buy Sydney airport 2030 ILB at ~4% + CPI yield and it will cost less to buy and nothing to hold.

I know which would be my preferred investment route.

 

[Tano]

Where can a retail 'investor' buy these Sydney Airport bonds?

 

[HyperText]

I started buying in 1995
Why?
I could finance 100%
I could be positively geared immediately
I was buying 4 bed homes for $97K
$280/ week rent and Interest only at 6.5%

Just kept buying while the bank supplied the money.
Still hold 4 properties all freeholded from the initial
buys.

Now supplying passive income. (Which is my
primary investment goal).

Just showing how I recognised opportunity.
Not that hard!

Were these homes that you were buying in a country area or in a city such as Sydney? The reason I ask is because if you had bought is a country area these returns are typically higher than in a major city however it is more risky than the cities because country towns don't have as much growth which means you may have little or no capital gain.

 

[sydboy007]

Where can a retail 'investor' buy these Sydney Airport bonds?

fiig allow you to purchase them - they break them down from the 500K tranches you normally have to buy

they even started allowing you to buy in 10K lots instead of 50K

not sure if other companies provide a similar service.

i used them to buy an Envestra 2025 ILB that yields me 3.4% + CPI and has had capital growth of ~3% since December.

I've said in previous threads that a combination of ILB and IAB with some floating rate or fixed interest thrown in can provide quite good income streams at relatively low risk.

Southern Cross Airports Corporation Pty Ltd 2030 ILB currently offers a yield of 7.25% (CPI at 2.5%) and the 2020 ILB around 6.85%, with Envestra still offering 6.45%

I'm seriously considering selling out of more equities, but am already around 60% bonds / hybrids in my SMSF, but at the above kinds of yields am thinking I can live with those kinds of returns for the next 7 to 17 years

 

[Tano]

fiig allow you to purchase them - they break them down from the 500K tranches you normally have to buy

they even started allowing you to buy in 10K lots instead of 50K

not sure if other companies provide a similar service.

i used them to buy an Envestra 2025 ILB that yields me 3.4% + CPI and has had capital growth of ~3% since December.

I've said in previous threads that a combination of ILB and IAB with some floating rate or fixed interest thrown in can provide quite good income streams at relatively low risk.

Southern Cross Airports Corporation Pty Ltd 2030 ILB currently offers a yield of 7.25% (CPI at 2.5%) and the 2020 ILB around 6.85%, with Envestra still offering 6.45%

I'm seriously considering selling out of more equities, but am already around 60% bonds / hybrids in my SMSF, but at the above kinds of yields am thinking I can live with those kinds of returns for the next 7 to 17 years

Thanks for the link and the info.

 

[DB008]

And people are suggesting that Australia is in a bubble?

Bloomberg

San Francisco’s Million Dollar Homes Spur Condo Surge

San Francisco’s median house price is poised to surpass $1 million this year after setting a record in May, the California Association of Realtors estimates. The county is the only one in the state with values to set a new high, said Leslie Appleton-Young, chief economist for the group. A limited supply of houses available for sale has allowed condo developers to step in and lure frustrated buyers such as Boortz.

The San Francisco area had the biggest gain in home prices among 20 U.S. cities in the S&P/Case-Shiller index, according to data released yesterday. Single-family house prices in April jumped 24 percent from a year earlier, compared with gains of 12 percent of the broader gauge, which was still the biggest advance in more than seven years.
The median price for a single-family home sold in the city was $947,260 in May, up 2.7 percent from April and 32 percent from a year earlier, according to the state Realtors group. It topped the $932,350 record set in 2007. Surpassing $1 million “certainly looks like it’s going to happen,” said Los Angeles-based Appleton-Young.

http://www.bloomberg.com/news/2013-06-26/san-francisco-s-million-dollar-homes-spur-condo-surge.html

 

[Peak Debt]

Useful chart here from APF, gives a good snapshot of the housing market today...

 

[sydboy007]

i shake my head in disbelief

The elderly owner of a dilapidated Surry Hills two-bedroom terrace watched in amazement as his home sold for $894,000 - almost $200,000 over reserve on Saturday. From his nursing home bed via video phone, he saw five groups do battle. There were 38 contracts out and 18 registered bidders for 74 Sophia Street, on a tiny 105 square metre block, with no hot water in the kitchen and an outdoor bathroom. He had paid less than $50,000 for it in the 1970s. "He just couldn't believe it,'' Spencer & Servi principal David Servi said. First home buyers had been interested, but it was bought by a builder in his 20s.

I'm only a 30 minute walk from the CBD and you could easily buy a ready to move in house for less than that - heck my 3 BR house with off st parking would be luck to sell for $895K than that and certainly is ready to move in.

Seems like the RBA is getting its wish on inflating the housing bubble yet again with artificially low interest rates.

 

[ftw129]

Seems like the RBA is getting its wish on inflating the housing bubble yet again with artificially low interest rates.

Sarcasm? Surely you don't actually think that that's the reason for lowering interest rates...

In any case I believe that waiting for the property prices in Australia to come crashing down is a big mistake.

Any slow down or correction will be a buying opportunity for the many that are seething about the fact that they did not buy many more in their younger years and instead wasted their money on holidays and coffee.

The best time to buy property is and always will be now.

 

[sydboy007]

Sarcasm? Surely you don't actually think that that's the reason for lowering interest rates...

In any case I believe that waiting for the property prices in Australia to come crashing down is a big mistake.

Any slow down or correction will be a buying opportunity for the many that are seething about the fact that they did not buy many more in their younger years and instead wasted their money on holidays and coffee.

The best time to buy property is and always will be now.

One of the stated aims of lower interest rates has been to move growth from the resource sector back to housing and retail.

Would you like to put up some financial statics to compare buying versus renting and investing the difference?

rental yields are still lower than mortgage interest rates. Factor in buying and selling costs, maintenance and holding costs, and it's clear from a financial point that renting is far cheaper than buying. If you've decided to never buy a house and don't mind salary sacrificing some of the difference between renting and buying then you've got a nice low taxed way to save for retirement.

Factor in most people can afford to rent a lot closer to where they work than they can buy, and you win on the lower commute times. I worked with a guy who finally gave in to his GFs nagging to buy a house. They "emigrated" from St Leonards to the NSW Central coast as that had property in their price range (partly life style too since he liked to take his tinny our fishing). His commute time went from 20 min door to door drive to 1.5 hours of drive train and walk, along with the regular train delays and cancellations he had to put up with.

So I say while property investors are ready to subisdise rent people might as well take advantage of it.

 

[kid hustlr]

Which suburb are you in?

Surry hills and around that area is in high demand, I completely agree that the sale in this case is way over price but you don't know his reasons for purchasing.

Times are changing. The picket fence and quarter acre out in the sticks isn't the dream anymore. people want to be close to the city and close to work. home owners would rather pay up for a 2br apartment or a small townhouse in a convenient area than endure a 1 hr commute each way.

I don't thnk the RBA is trying to 'inflate house prices' fwiw.

 

[ftw129]

One of the stated aims of lower interest rates has been to move growth from the resource sector back to housing and retail.

Do you have a link that I can refer to? I'd like to try to interpret this for myself.

Would you like to put up some financial statics to compare buying versus renting and investing the difference?

No, but I'll be interested in reading yours since this is something that you're bringing up. (I'm relaxing with a book today and lot's of different varieties of tea )

rental yields are still lower than mortgage interest rates. Factor in buying and selling costs, maintenance and holding costs, and it's clear from a financial point that renting is far cheaper than buying. If you've decided to never buy a house and don't mind salary sacrificing some of the difference between renting and buying then you've got a nice low taxed way to save for retirement.

A lot of generalisations here which may or may not apply to everyone.

Factor in most people can afford to rent a lot closer to where they work than they can buy, and you win on the lower commute times. I worked with a guy who finally gave in to his GFs nagging to buy a house. They "emigrated" from St Leonards to the NSW Central coast as that had property in their price range (partly life style too since he liked to take his tinny our fishing). His commute time went from 20 min door to door drive to 1.5 hours of drive train and walk, along with the regular train delays and cancellations he had to put up with.

Not sure what you're trying to convince me of here.

So I say while property investors are ready to subisdise rent people might as well take advantage of it

I rent where I live and I own what I rent out, so clearly we agree on something here

 

[sydboy007]

Which suburb are you in?

I don't think the RBA is trying to 'inflate house prices' fwiw.

I live in Erskineville which is fairly close to the city, but far enough away too.

Part of the process for lower interest rates is to inflate asset prices, and let the wealth effect encourage people to spend more.

 

[ftw129]

Part of the process for lower interest rates is to inflate asset prices, and let the wealth effect encourage people to spend more.

Sounds a bit more sensible with the key word there being "part" and also not pointing directly to housing...

A far cry from

Seems like the RBA is getting its wish on inflating the housing bubble yet again with artificially low interest rates.

 

[Uncle Festivus]

It would seem a fairly simple equation?

Global GDP falling to recessionary levels ie a new global recession.

Interest rates at 'emergency' lows - there are more savers than spenders now so less spending velocity in the economy?

Unemployment rising - similar story here to other developed economies, more part time burger flipper type jobs than full time good money jobs.

Spanner in the works - expats returning from Euro recession countries need to live somewhere?

It's been a great bubble for the last 50 years but even the best party must come to an end, just too many uninvited guests - who called the cops???

It's going to be a doozy of a Hangover.........

How long can these 2 charts keep going in the same direction?

 

[sydboy007]

Sounds a bit more sensible with the key word there being "part" and also not pointing directly to housing...

A far cry from

Non tradable inflation is humming along nicely at around 3.5%-4%. The tradable sector has bounced back sharply and I'd say it wont be long before it turns positive too.

In that kind of scenario current interest rates are artificially low.

The RBA knows a housing bust in this country would pretty much bankrupt us. Our banks are practically building societies with a bit of wealth management tacked on. We've become a nation of loss making landlords. Rental properties in aggregate have not made a profit since 2000. The accumulated losses are around the $65B inflation adjusted.

Just for interest sake, what would you say the gross and net yield is on your IP? Is it +/- geared?

I think the 6% mark for unemployment is when we start to see the housing bubble deflate. Underemployment will be a huge issue by then as well. Already rental yields have started to stagnate in a lot of markets. Some have turned negative.

Below are some of the scary stats Australia has in regards to property