The future of Australian property prices

[KurwaJegoMac]

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

Referring to your graphs:

Graph 1: Debt outstanding, % of GDP

How is this graph 'scary'? All I see is most developed countries having significantly higher debt (especially private debt) compared to Australia. We're at the bottom of that list and as far as I know only a handful of those countries above us had/have severe property downturns - in fact, most are still going strong yet have 50-200% more debt than us. We also appear to have the lowest % of public debt. Sounds more like a win for us.

Graph 2: Debt as a Percentage of Annual Disposable Income

All this graph shows is that property became seen as an investment vehicle in the early 90s. The start of the information age gave means for your average joe blow to learn to invest in property (something that the big boys have been doing since the dawn of time) - couple that with negative gearing being introduced and we have that graph... So what? Our average debt stands at 150% of disposable income? While it's higher than the past, it's not unreasonably high for an investment - hell, I wish I could buy strong business at that rate!!!

Graph 3: Net Rental Income

This one isn't as pretty, but nor is it that bad. If you borrowed 80% LVR against shares, your net income would show similar trends - your income will come in the future in the form of capital gains, the same as what people are expecting from property. So the question is, why is it ok for shares, but not for property?

Second - based on 2008-2010 the trend seems to be improving at a rapid rate. So how is this bad? Based on the trend in that graph we'll be at 2002 levels right now. Would be interesting to see recent data, but that might not paint the right picture for those presenting the information now would it?

Graph 4: Gross Yield

All this shows me, is that the yield on property has been largely consistent for the last 50 years - and that's a bad thing how? How is what happened 100 years ago relevant to the last few decades?

Do we pull up a chart of rental yields from 1400BC and bemoan that we cant get those rates today?

Graph 5: Peak to trough

This table is absolutely rubbish

Go put together a table of all stocks and show the inflation adjusted fall since the stock hit it's individual peak and present it to everyone on the forum. You watch the reaction.

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Be objective in your analysis and think about what agenda the person is trying to push.

As they say: There's lies, damn lies and statistics

 

[ftw129]

This thread can and will go around in circles forever and that's great, that's what makes a market and creates opportunity but let's really step back and look at the bigger picture.

Ideally, property should be seen as a long term investment vehicle with a view to hold for as long as possible, preferably forever. It is far to expensive to trade in and out of and trying to predict and time the corrections is not worth the risk.

For someone like myself, who intends to pretty much hold on for at least another 25-30 years minimum, I can only hope that there are some decent opportunities along the way where people are freaking out and dumping property. Fingers crossed but I won't hold my breath. I will buy when my finances allow me, not based on what I think the market will do. Not even the "experts" get that game right. Who cares what the price may or may not be in 5-10 years. Hopefully down so we can buy more right?

Trade in and out of shares, derivatives, currencies, whatever tickles your fancy but accumulate wealth in property.

If there's anyone who truly believes that you will lose on good quality, sensibly located Australian property in either Sydney or Melbourne in 30 years time then I take my hat off to you for being so brave as to predict the beginning of the end of a long term trend that started at the beginning of the industrial world.

The real future (30-50 years and beyond) of Australian property prices is and always will be UP.

 

[satanoperca]

Referring to your graphs:

Graph 1: Debt outstanding, % of GDP

How is this graph 'scary'? All I see is most developed countries having significantly higher debt (especially private debt) compared to Australia. We're at the bottom of that list and as far as I know only a handful of those countries above us had/have severe property downturns - in fact, most are still going strong yet have 50-200% more debt than us. We also appear to have the lowest % of public debt. Sounds more like a win for us.

Love this rational, so we have cancer, it is just not at terminal stage yet.

 

[sydboy007]

Referring to your graphs:

Graph 1: Debt outstanding, % of GDP

How is this graph 'scary'?

Graph 2: Debt as a Percentage of Annual Disposable Income

All this graph shows is that property became seen as an investment vehicle in the early 90s.

Graph 3: Net Rental Income

This one isn't as pretty, but nor is it that bad.

Second - based on 2008-2010 the trend seems to be improving at a rapid rate. So how is this bad?

Graph 4: Gross Yield

All this shows me, is that the yield on property has been largely consistent for the last 50 years - and that's a bad thing how?

Graph 5: Peak to trough

This table is absolutely rubbish

Go put together a table of all stocks and show the inflation adjusted fall since the stock hit it's individual peak and present it to everyone on the forum.

-----------------------------------

Be objective in your analysis and think about what agenda the person is trying to push.

As they say: There's lies, damn lies and statistics

1 - So you feel OK that the private sector in Australia has a gearing ratio of around 300%? One day it will cripply the economy.

2 - This debt is also highly concentrated. I wish I could find something that actually showed the debt levels of those with debt. Something like 1/3 of Australians have no mortgage.

3 - So you think a IP sector that in aggregate can't make a profit is sustainable? It might be with a stable or growing economy, but what happens as Australian unemployment creeps up past 6%, and underemployment balloons as more workers get shifted to part time of casual hours - still statistically employed but a decent drop in income?

4 - It's gross yield. I hate to think what the true net yield is. I'd say you could easily slice of 0.5%. Most likely a lot of IP is yielding < 3% net of all expenses.

5 - I understand what you're saying, but am posting in the property thread. I just see too many people blinded by negative gearing and unrealistic projections of capital growth for property. The holding costs and purchase / sale costs also tend to be glossed over. Also too many people don't factor in inflation. If you hold an asset for 10 or 20 years then inflation is a very detrimental part of the equation. If you are losing money every year, inflation is taking another 2.5% a year, then I question why say an inflation adjusted negative yield of 5-5.5% is good. That means capital growth of around 6% a year is required just to stand still.

 

[KurwaJegoMac]

Love this rational, so we have cancer, it is just not at terminal stage yet.

Love how you see it as cancer.

Debt is not a cancer in itself. Cancer in this case is unsustainable levels of debt for the purchase of liabilities, or assets reliant on the 'greater fool' theory.

From the table you can't determine what the debt is being used for and whether it is sustainable, so making assumptions that we have a 'cancer' based on that information is frivolous.

Be objective.

 

[KurwaJegoMac]

Thanks for responding in a pleasant manner, I like a healthy debate and we need more responders like that.

1 - So you feel OK that the private sector in Australia has a gearing ratio of around 300%? One day it will cripply the economy.

I don't feel comfortable for anyone (private or public) to have high levels of gearing - you risk hitting unsustainable territory. 300% - is it really that much? Unless I'm having a brain fart, we're talking about private sector being geared at 3 times what the nation produces (i.e. 3 times Australia's earnings). Maybe i'm missing something here, but that doesn't seem like much?

Happy for anyone to elaborate on this.

2 - This debt is also highly concentrated. I wish I could find something that actually showed the debt levels of those with debt. Something like 1/3 of Australians have no mortgage.

Fair enough. To counter, it appears to have always been highly concentrated and provided the concentration is on assets as opposed to liabilities the issue is more around the debt level than the concentration.

I too would love to see total debt and if you're stat around 1/3 of Aussies without a mortgage is correct then coupled with graph 1 that may be a problem.

3 - So you think a IP sector that in aggregate can't make a profit is sustainable? It might be with a stable or growing economy, but what happens as Australian unemployment creeps up past 6%, and underemployment balloons as more workers get shifted to part time of casual hours - still statistically employed but a decent drop in income?

I'll assume you mean to say 'income' not 'profit' because the chart doesn't talk about profit.

To answer your question on whether the IP sector not making an income is sustainable - well that depends on what you mean by sustainable. If you mean constant gains year on year, then no, it definitely will not be sustainable. If you mean over time you have a positive uptrend, then yes that will be sustainable. I think what we will see is a period of greater volatility than we're used to. Higher highs, lower lows - similar to the behaviour of shares.

The reason being is without a positive income, you're relying on capital appreciation and 'greater fool theory' - it means when things are going good, everyone will pile in and when things go bad, well we have the US as a great example. I think we have a very real danger in Australia, as well as most developed countries - it will not be a steady, predictable decline that we can forecast. If we are to drop, it will be a black swan event and when it falls, it will fall hard and fast.

The thing about black swans is you can't predict them so I think the best approach is to have appropriate risk mitigation in place rather than bet on a black swan which is what most people are doing.

4 - It's gross yield. I hate to think what the true net yield is. I'd say you could easily slice of 0.5%. Most likely a lot of IP is yielding < 3% net of all expenses.

Agree on those points above, but it does not change that the gross yield has not changed for the last 50 years.

What we'd need then is to understand whether expenses have increased as a percentage of gross yield - then with that information we can understand what the net yield is and be able to draw a conclusion from the graph that helps us in our understanding.

As it stands, the graph is not useful and just shows we've been the same for the last 50 years (which in isolation, is actually a good thing).

5 - I understand what you're saying, but am posting in the property thread. I just see too many people blinded by negative gearing and unrealistic projections of capital growth for property. The holding costs and purchase / sale costs also tend to be glossed over. Also too many people don't factor in inflation. If you hold an asset for 10 or 20 years then inflation is a very detrimental part of the equation. If you are losing money every year, inflation is taking another 2.5% a year, then I question why say an inflation adjusted negative yield of 5-5.5% is good. That means capital growth of around 6% a year is required just to stand still.

I get those points and they're all valid - they are however seperate points of discussion relative to what I'm talking about with that table.

What benefit do you get from looking at all the states and evaluating their 'peak to trough' or 'highest point to current price'? I'll present this to you - "Brisbane is 16.7% lower than its' peak 5 years ago; I'm going to buy it because its' cheap relative to what it was!" Would you make an investment using this thought pattern? Certainly not. And do you care if Brisbane is 16.7% lower than 5 years ago compared to Sydney is 8.7% lower than 9 years ago? Different time periods, different markets.

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Thanks once again for your polite response. Apologies if I sounded patronising or rude in my post, that was not intended. I get a bit fired up and passionate when debating (i'm actually a property bear atm too!) :

 

[sydboy007]

Thanks once again for your polite response. Apologies if I sounded patronising or rude in my post, that was not intended. I get a bit fired up and passionate when debating (i'm actually a property bear atm too!) :

It's this kind of discussion that I signed up for. Much more interesting that what is the norm in the general chat forums

Interesting snippet from the SMH today:

Almost 1.3 million people own at least one investment property. About two-thirds of those, about 867,000 landlords with rental income, report a loss on their investment.

We've never had a recession where so many people have an IP, and it's a real worry that a decent chunk of IPs are negatively geared.

i read an article last year that said in Germany house prices have not increased in real terms over the last 30 years. i wish the same could be said for Australia. It would certainly make for a more resilient economy if we didn't have so much unproductive debt bleeding the country.

I think the black swan event will just be the typical increase in unemployment as the economy slows.

The below chart shows that IP debt is roughly equal to PPOR debt. The level of debt seems to have flat lined for the last 3 years. Without an increase in debt levels, I don't see that property prices can really go up that much. But with the savings rate now back to around the historical average of 20% (pre rush into buying a negatively geared IP) I'd say in general terms prices can increase around the rate of growth in income of 3-4%. Oh I add in super to the current savings rate to match the long term savings rate.

My main aim is to make people who are thinking of buying an IP to really think about the economics of it. I've known at least 3 people who bought an IP only to realise when it was too late that they'd either over paid, or that a bad tenant could just about bankrupt them, and that loosing money every month for many years was a real drain on the finances.

I really wish negative gearing was quarantined against the income of the asset. That would really save billions on the budget and also make people focus more on the overall income and growth of the asset than the tax effectiveness.

Personally I just don't see how you can make money on a negatively geared property when you need to get 5-6% capital growth a year just to break even. Even a positively geared IP is not a great investment. Net yield of 3% + whatever capital growth you get. After 10 years of ownership you'll need to do a decent renovation to get top dollar on sale.

There's plenty of corporate bonds out there that give nice CPI+ returns with minimal risk and practically no holding costs. As one of the charts below shows, real house price growth is a relatively recent thing for Australia, and the increase that has occurred is not repeatable, unless we start moving towards 300% of income debt levels.

 

[FlyingFox]

My main aim is to make people who are thinking of buying an IP to really think about the economics of it. I've known at least 3 people who bought an IP only to realise when it was too late that they'd either over paid, or that a bad tenant could just about bankrupt them, and that loosing money every month for many years was a real drain on the finances.

I really wish negative gearing was quarantined against the income of the asset. That would really save billions on the budget and also make people focus more on the overall income and growth of the asset than the tax effectiveness.

Personally I just don't see how you can make money on a negatively geared property when you need to get 5-6% capital growth a year just to break even. Even a positively geared IP is not a great investment. Net yield of 3% + whatever capital growth you get. After 10 years of ownership you'll need to do a decent renovation to get top dollar on sale.

I find it amazing how difficult it is to get this point across, even to people I would consider to be relatively sharp. How is losing money to save tax a good idea? Especially if your not in the top tax bracket.

Also getting the point across that this doubling in 7 yrs is not historical. May have happened in the lat 10-15 max 20 years due to a once in a generation (or more) set of events culminating. That is not always!

 

[KurwaJegoMac]

I find it amazing how difficult it is to get this point across, even to people I would consider to be relatively sharp. How is losing money to save tax a good idea? Especially if your not in the top tax bracket.

Also getting the point across that this doubling in 7 yrs is not historical. May have happened in the lat 10-15 max 20 years due to a once in a generation (or more) set of events culminating. That is not always!

Totally agree - it amazes me how many times I get told the following by people I know:

"The point of property investing is to maximise your loss every year so you can get the biggest tax deduction"



I respond: "Wouldn't you prefer to make a profit?"

They respond: "No, because then you have to pay tax"



I even simplify it down for them: "What's better: earning $1, paying 30 cents in tax and being left with 70 cents in the bank account or losing $1 and getting a 30 cent tax deduction?" They STILL say it's better to lose the $1 because you get a tax deduction

hmm... I think I need new friends...

 

[FxTrader]

I find it amazing how difficult it is to get this point across, even to people I would consider to be relatively sharp. How is losing money to save tax a good idea? Especially if your not in the top tax bracket.

The economics of postive cash flow property depends on tax deduction offsets against income to generate a net after tax profit each month. "Losing money to save tax" is not really the point since property investors have different objectives for their investment. Those who are willing to sustain negative cash flow in the hope that future capital gain will give them a profit are speculators IMO.

Also getting the point across that this doubling in 7 yrs is not historical. May have happened in the last 10-15 max 20 years due to a once in a generation (or more) set of events culminating. That is not always!

Indeed, and that is why cash flow should be emphasized over capital gain with IP.

 

[sydboy007]

It looks like job losses in Perth are starting to hit the rental market there. Breaking of leases has doubled compared to this time last year and the vacancy rate is now up at 3.3%

 

[moXJO]

Whoa movement on the property thread. Must be time to look at buying again

 

[sptrawler]

It looks like job losses in Perth are starting to hit the rental market there. Breaking of leases has doubled compared to this time last year and the vacancy rate is now up at 3.3%

I will be amazed if the W.A housing sector, doesn't have a hard landing. My guess would be in 12 - 18 months time.
I'm not so sure about the Eastern States, don't live there, never have, so can't judge the dynamics.

 

[sptrawler]

I will be amazed if the W.A housing sector, doesn't have a hard landing. My guess would be in 12 - 18 months time.
I'm not so sure about the Eastern States, don't live there, never have, so can't judge the dynamics.

I am basing my beliefs on the normal boom and bust cycle we tend to see in W.A. The demand for housing tends to ebb and flow with construction and mineral cycles. This is mainly due to the high dependence on these two for employment.
Mining and mine development is very labour intensive and the last 10 years has seen an exponential growth. This feeds the secondry services economy in W.A, especially Perth and the surrounding areas.
From people I know in mining, it is contracting sharply and companies are laying off workers on a regular basis. Gold and Nickel are taking a big hit at the moment as the price of both is currently running at close to the cost of production.
Newmont and Newcrest have started winding down activity and Kalgoorlie based producers are cutting back.

The main problem W.A faces as opposed to the Eastern States, is the lack of manufacturing employment, also the lack of population density to provide services employment. Tourism is very limited and provides little in the way of steady employment.
Unless there is a rebound in commodity prices or worse still if there are further slides, I feel there will be an increase in unemployment in the next 12 months. This I feel, will have to have a flow`on effect to house prices.
Currently there seems to be a high proportion of Indian and Asian buyers( in my area) that appears to be holding prices up.
How long this can be sustained is anyones guess. I feel there will be an increase in housing stock, that must eventually exceed this demand.
The next 12 to 18 months should be interesting.

 

[MARKETWINNER]

Despite prediction on housing bear market by some experienced property investors and experts, housing prices didn't go down in New Zealand and Australia during last couple of years when we compare with Europe and USA.

Future housing market is depending on demand and supply, credit market, speculators and other strong economic activities etc.

I don’t think property players can make profit as before in the coming decade in Australia and New Zealand. Either it will stagnate or prices will come down depend on type of houses that we have. There will be demand for three bed room houses than other houses in the coming decade. I have done more study on housing market in USA including sub-prime bubble. I am looking forward to do more study on housing market in Australia and New Zealand. Currently housing prices in Auckland is very high. Housing prices have stagnated in Wellington. There are some demands for houses in Christchurch now.

Experienced players have edge in housing market than others. First time home buyers should do home work before buy their houses in New Zealand, Australia and UK.

My ideas are not a recommendation to either buy or sell any security, property or currency. Please do your own research prior to making any investment decisions.

 

[Julia]

Despite prediction on housing bear market by some experienced property investors and experts, housing prices didn't go down in New Zealand and Australia during last couple of years when we compare with Europe and USA.

I don't know how you can make such a generalisation. In the regional area of Qld where I live house prices have fallen around 30%.

There are some demands for houses in Christchurch now.

That is because a large % of housing stock has been eliminated from the market as a result of the earthquake.
Ergo, way more pressure on existing stock which is selling at often unrealistic prices. This is a situation unique to Christchurch and should not be taken as an overall indicator for NZ.

 

[Smurf1976]

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.

I've noticed a definite trend toward higher prices at supermarkets recently. Either outright price increases of a noticeable amount or, increasingly common, shrinking package sizes of the actual product whilst maintaining the same price. A few random examples as follows.

Woolworths have shrunk the size of kebabs by 10%. Price is the same, but you get less.

Pasta sauce that I frequently buy has shrunk in size by 14%. Same price, just less product.

Cat food has gone up in price, mostly by the old trick of it being on special then when it comes off special the new price is higher than it used to be by 10% or so.

Petrol has increased in price by about 9% over the past few weeks.

Electricity keeps getting more expensive by significant amounts (the actual amount varies around the country but it's going up significantly).

Whilst serious tradies don't buy them, "cheap" tools are no longer so cheap judging by what I've noticed at hardware stores lately. For a DIY'er who just wants it for occasional use, they now have to pay double what they would previously have paid. That said, I suspect the quality might (might....) be slightly better, but that's not really an issue for the occasional user.

Solar panels have been falling in price quite sharply over the past few years. But now they've gone up around 10% (just for the panels, not sure about the prices for an installed system).

I've stopped trying to remember the price of bus fares etc in other Australian cities that I visit periodically simply because every time I go there, the price is higher than it was previously.

If you go to major sporting events, concerts, music festivals etc then slowly but surely they are getting more expensive. For annual events, you can be pretty damn sure that the price this coming summer will be higher than it was last summer.

For events like Soundwave (as one that comes immediately to mind), the lower AUD combined with heavy reliance on overseas artists would be affecting costs pretty seriously I'd expect. At a guess, organisers will assume there's a limit to the extent to which ticket prices can be raised without attracting too much negative publicity, so will be forced to do a bit of quality reduction (that is, have fewer and/or cheaper bands performing) as well. That's just a guess but I think it's fairly likely. Rising fuel prices won't be helping there either.

So I think that we're already starting to see inflation feeding in, partly hidden by a reduction in quality. It's not in a huge way at the moment, but it's there.

Personally, it's the quality reductions which bother me more than the price rises as such but then I'm fairly fortunate. I can afford to pay more but money isn't much help if the band isn't on the lineup or there's poorer quality ingredients in the food. It's not just about paying more - some things just won't happen at all if costs go up sufficiently since they depend on volume to be viable and not everyone can, or will want to, pay the higher cost.

Unless you have a lot of mortgage debt (which contrary to media hype is only a relatively small portion of the population - the rest either rent, own outright or have a reasonably small mortgage) then there isn't really anything of significance that's getting cheaper to offset the rises elsewhere. Even if you really do buy a new TV etc every year, they are so cheap now anyway that any further fall in prices won't do much good in terms of an outright $ saving.

As for property prices, they're harder to judge since there isn't a daily market price on individual houses. But looking around my local area I'd say that prices for "average" houses are much the same as 2007, perhaps down very slightly but not a lot. But if that is expressed in "real terms" taking inflation into account then it's a substantial drop.

At the upper end of the market there has been a substantial fall however. Overall, I'd say that the upper end of the market has definitely declined in price substantially, there has been minimal change at the middle level, and at the lower level prices have dropped 10 - 15% for "renovator's delights".

It's to the point that I could sell this house at close to what I paid for it, hand over another $100K, and buy a mansion just up the hill. I'm not a person who likes moving, and this house is perfectly adequate, but the idea is in the back of my mind. Also very noticeable is that many of the expensive places are clearly not being lived in (no furniture inside etc) and are quite blatantly noted as "must sell" type situations in real estate listings.

Also very noticeable is a new area developed nearby in 2007 - 2008. All the houses are large, many with somewhat fancy designs. And there are "for sale" signs all over the place now.

 

[Tink]

HOUSE prices in Perth, Sydney and Melbourne have led rises in most of the capitals with buyer confidence surging to its highest level since 2007, according to separate reports released yesterday.

In Perth, residential prices rose 4.4 per cent for the three months to July 31 and were up 8.3 per cent for the year to a median of $494,600, while Sydney's residential values rose 3.7 per cent for the quarter and 6.5 per cent for the year to $570,000, according to RP Data.
Melbourne's market rose 2.4 per cent for the three months.
Hobart was up 2.1 per cent for the quarter but down 0.4 per cent for the year. Canberra was up 1.4 per cent for the three months and 4.1 per cent for the year.
Adelaide (down 3.1 per cent for the quarter), Brisbane (down 0.7), and Darwin (down 0.9) were the cities in negative territory.

Research director for RP Data Tim Lawless said investors were back in the market, drawn by capital gains and rental yield rising 9.4 per cent, according to the group's accumulation index. However, this would also result in housing affordability being back on the agenda, Mr Lawless said
Next week the Reserve Bank is expected to cut the cash rate, which stands at 2.75 per cent.

http://www.theaustralian.com.au/new...ices-surge-ahead/story-e6frg6nf-1226689790063

 

[sptrawler]

Perth is still going gangbusters. However I am hearing from friends in the housing market, that rents are softening and days on the market are extending.

http://au.news.yahoo.com/thewest/a/-/newshome/18436969/perth-house-prices-surge-to-new-highs/

 

[sydboy007]

A few snippets from the SMH today

Average advertised mortgage rates are now slightly above those of late 2009, at the tail end of the financial crisis. But unlike four years ago, the response from consumers has been tame. Annual growth in housing credit is only just above a record low, at an annual pace of 4.6 per cent, less than half the growth rate before the financial crisis.

Seems we are now taking on extra mortgage debt at around the growth in wages - a good thing AFAIK

Among the 37 per cent of people with mortgages, there is a trend towards keeping monthly repayments steady, rather than spending the extra cash made available by a rate cut.

So possibly we would have been better tweaking some other marco policy to stimulate growth considering only 1/3 people largely benefit from falling interest rates and a lot have lost psending power from them.

Renters and people who own their own home outright, meanwhile, are getting a lower return on their bank deposits. In short, very cheap debt is having a more limited impact on key groups in the market, because Australians appear much more financially conservative.

Now it seems the economists are finally realising the debt burden means we really can't increase borrowings much more. The credit cycle will have to go on a pretty extended breather before households are in a position to increase spending faster than incomes again.

Unlike previous rate-cutting cycles, the economy is now grappling with the end of two boom periods. The first of these is well known, a mining investment boom that probably peaked earlier this year.

The second, however, is a long-term build-up in household debt levels over the 1990s and early 2000s facilitated by a one-off shift towards lower interest rates.

It is this second boom - often overlooked - that resulted in the ratio of household debt to disposable income ballooning from 50 per cent in the early 1990s to 150 per cent in 2010.

Now, economists suspect the end of this second boom is also preventing many people from responding to interest rate cuts as they have in the past.