The future of Australian property prices

sydboy007 said:

another graph that shows the perverse effect the halving of CGT had in 2000. It's like lift off into space.

The question is, if there's not enough income to support the loan, and the capital growth wont keep pace with inflation and losses, how long before the investors start to decide to sell. Once the selling tide turns I can see it being a scary place to have your money locked up.

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You need graphs on the % of people with incomes of x and home loans above y to get an idea of any future shock or distress.

moXJO said:

You need graphs on the % of people with incomes of x and home loans above y to get an idea of any future shock or distress.

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I could be wrong, but my thinking is that it only takes a small % of IP owners to be in trouble and start selling for prices to start falling.

Once that happens, those not really in trouble start to look to the exits too. Once the rush starts it's hard to stop.

It might not happen, but if we do get an uptick of 1% in unemployment, which really under reports the income distress being felt, I'd expect to see NG IPs hitting the market.

Once the house prices doubling in 7 years myth is finally killed, a lot of boomers will want to sell.

sydboy007 said:

my thinking is that it only takes a small % of IP owners to be in trouble and start selling for prices to start falling.

Once that happens, those not really in trouble start to look to the exits too. Once the rush starts it's hard to stop.

It might not happen, but if we do get an uptick of 1% in unemployment, which really under reports the income distress being felt, I'd expect to see NG IPs hitting the market.

Once the house prices doubling in 7 years myth is finally killed, a lot of boomers will want to sell.

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Let's hope so

Seems like for Abbot and Co the status quo will do quite nicely.

Out of 48 discussion papers for the Coalition not one mentions housing.

At least family first have come up with a reasonable policy for reducing the cost of housing, but I dare say the big parties know a decent fall in the cost of housing could destabilise the B4 banks so there's not a great deal of incentive when the Govt is the one footing the bill in any shakeout.

http://tinyurl.com/ndzu4o8

Some very good commentary by Saul Eslake on the housing market in Australia - http://tinyurl.com/pb9amzp

Some of the main points:

FHB Grants began in the 1960s and have been cancelled and then re-introduced a number of times ever since. According to Eslake, governments have spent a total of around $22.5 billion in grants in 2010-11 values over the past 50 years, yet homewonership rates have not increased over this period. They provide minimal benefit to FHBs, acting to inflate values for the benefit of vendors. In this regard, they have been a massive failure, although the recent shift towards newly constructed dwellings is a significant policy improvement.

In the United States, which hasn’t allow ‘negative gearing’ since the mid-1980s, the rental vacancy rate has in the last 50 years only once been below 5% (and that was in the March quarter of 1979); in the ten years prior to the onset of the most recent recession, it has averaged 9.1% (see Chart 8 above).

Yet here in Australia, which does allow ‘negative gearing’, the rental vacancy rate has never (at least in the last 30 years) been above 5%, and in the period since ‘negative gearing’ became more attractive (as a result of the halving of the capital gains tax rate) has fallen from over 3% to less than 2%.

During that same period, rents rose at rate 0.8 percentage points per annum faster than the CPI as a whole; whereas over the preceding decade, rents rose at exactly the same rate as the CPI.

65% of Landlords make a loss

sydboy007 said:

Seems like for Abbot and Co the status quo will do quite nicely.

Out of 48 discussion papers for the Coalition not one mentions housing.
http://tinyurl.com/ndzu4o8

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Of course the Libs support the status quo: the haves (property owners and speculators) against the have nots (a whole generation being priced out of the market). The only way to make housing affordable is to get rid of negative gearing and toughen up CGT rules. Why should you be able to buy a house, sell it for a huge profit, and not pay tax? You pay tax on every other investment. And why should tax payers subsidise housing investors on their borrowing costs through negative gearing? With insane rorts like these driving the property market, you'd be mad not to put your money in real estate.

Don't expect Labor to do anything, though. Keating tried but got nowhere, and can you imagine the furore from vested interests if anyone started rolling back these sacred property industry cows. Think the campaign against the mining tax, then multiply it by 10.

Even Glenn Stevens is in on the act. For his stated concerns about "weakening economic conditions" read "falling property prices". House prices start to fall and Mr. Million Dollar Man hacks the hell out of interest rates. You can't blame him, really. The Australian economy has become the property market. We can handle a downturn in the mining industry, but if property prices collapse, so does the economy.

But while real estate investment has driven wealth creation, and therefore the Australian economy, in recent years, it is now strangling it. Why are restaurants, retail outlets, service industries, etc. struggling? Overpriced rents, and reluctant consumers counting their pennies because they are also struggling with punitive rents or enormous house borrowing costs. The economy is buckling, not under government debt, but private debt.

Logically, it all adds up to a crash in property prices. But you better hope it doesn't. We've gone too far now. Only prolonged recession will bring back affordable housing.

50% of new home loans in NSW is currently going to specufestors.

Real GDP per capita just 0.1% last qtr.

Going to be hard to find the income to support larger mortgages in the future.

sydboy007 said:

Real GDP per capita just 0.1% last qtr.

Going to be hard to find the income to support larger mortgages in the future.

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Yes you would think we have already hit the ceiling for house prices in a lot of areas.

Has anyone come across a spreadsheet that is capable of comparing the potential of investing say $100k in the share market as opposed to gearing the same $100k into property (eg deposit on 500k property)?

My wife is very keen to invest some of our funds into property (we have none now), and I cant see the economic sense in it in the current climate.

I am concerned about the opportunity cost of tying up the $100k in the property market as well as the likely low overall returns provided by rent and capital growth.

She is uncomfortable having all our investments in shares.

I would like to be able to compare the potential pros and cons of both our strategies.

Trade wind said:

The only way to make housing affordable is to get rid of negative gearing and toughen up CGT rules. Why should you be able to buy a house, sell it for a huge profit, and not pay tax? You pay tax on every other investment.

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That is just incorrect. You do pay tax on those so called "huge profits" if it is an investment property. It is just like any other investment, no special treatment. We are talking about capital gains on investments only, not negative gearing or principle place of residence.

galumay said:

Has anyone come across a spreadsheet that is capable of comparing the potential of investing say $100k in the share market as opposed to gearing the same $100k into property (eg deposit on 500k property)?

My wife is very keen to invest some of our funds into property (we have none now), and I cant see the economic sense in it in the current climate.

I am concerned about the opportunity cost of tying up the $100k in the property market as well as the likely low overall returns provided by rent and capital growth.

She is uncomfortable having all our investments in shares.

I would like to be able to compare the potential pros and cons of both our strategies.

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I've seen various charts over the years offering such a comparison over decades but have no idea how you'd do it. There are so many variables in each case. If, eg you took a bit less than a decade in the 70's and 80's, at least where I was at the time, there was huge profit to be made out of property. Other times if you jumped onto a bull run of shares, the same could apply.

I'd share your concerns. I look at IP every now and again but the net yield is woeful and I don't have a lot of confidence re capital growth in the near future. Might be quite wrong, however.

Julia said:

I'd share your concerns. I look at IP every now and again but the net yield is woeful and I don't have a lot of confidence re capital growth in the near future. Might be quite wrong, however.

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Thanks for your thoughts Julia, i may just continue to gently try to help my wife see my point of view!!

sydboy007 said:

65% of Landlords make a loss

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Yeah, I think the key to making a profit with negative gearing is to be there before or early in a strong rising market. I was in the 1980's market and did well.

Julia said:

I'd share your concerns. I look at IP every now and again but the net yield is woeful and I don't have a lot of confidence re capital growth in the near future.

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My feelings too. There are a few exceptions however, if you are willing and able to invest far and wide... and maybe with the help of some early urban planning trends, even inside information. In Brisbane for example, if you invested in some areas near the city and out Ipswich way early, but generally while capital city prices are being quoted or maybe selectively touted as indicative of slow to modest rises, I'm seeing many rural areas stagnant and vacant land prices still being discounted from the GFC high asking prices... 30% common, I've seen isolated cases of over 50%, but still well above the purchase prices from the late 1990's... although not much after considering holding costs.

Interestingly, at least in my region, there is still quite a lot of vacant land, but builders are not reporting much interest in new construction.

No doubt price inflation, particularly in energy costs, arguably as a result of carbon tax and state price gouging for revenue raising through their energy utilities is a significant factor.

galumay said:

Thanks for your thoughts Julia, i may just continue to gently try to help my wife see my point of view!!

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you could point out at the on going expenses (rate, body corporate, water, repairs insurance etc), the resulting pathetic return and the huge cost to buy/sell
and that is not thinking about the possible nightnmarish tenants and the fact a lot of your eggs are in the one basket
so illiquid it is not funny.
I could sell my share portfolio with onbe click at a cost of less than 1000$ for a 1 million portfolio..
and i can buy shares for gold, agricultural product industry, etyc here or world wide..
Why do you want to put most of your savings in a specific address in a specifc town/state/country???
This is gambling
yes you can win but a lot of people do lose too!!!
hope it helps
I do have one IP, own my own place but have no intention to increase the number of IP even here in Brisbane where I believe we will have a short term rise...
Cheers

galumay said:

Has anyone come across a spreadsheet that is capable of comparing the potential of investing say $100k in the share market as opposed to gearing the same $100k into property (eg deposit on 500k property)?

My wife is very keen to invest some of our funds into property (we have none now), and I cant see the economic sense in it in the current climate.

I am concerned about the opportunity cost of tying up the $100k in the property market as well as the likely low overall returns provided by rent and capital growth.

She is uncomfortable having all our investments in shares.

I would like to be able to compare the potential pros and cons of both our strategies.

Click to expand...

The issue with property is the gearing. Works a treat when the value increases, but not so great if you're getting CPI+ return - think 2.4% + 3.5% NG loss just to break even, let along factoring in you could have been in positive territory with another asset class.

The advantage with shares is you don't have to gear, and should you need some money down the track you can easily sell some. That is difficult to do with property.

Also factoring in the purchase, holding, sale costs of property and it's not pretty.

There's corporate inflation linked bonds offering CPI + 4%. It's a pretty nice yield, and the advantage is the CPI component is not taxable until sold, so if you hold the bond for over a year then you've been able to wonderfully convert the CPI component into a capital gain and halve the taxation on it. I've yet to find anything on the taxation implications should you hold to maturity.

qldfrog said:

Why do you want to put most of your savings in a specific address in a specifc town/state/country???
This is gambling
yes you can win but a lot of people do lose too!!!
hope it helps

Cheers

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Thanks, i have used most of your arguments! Her point is that real estate is a 'real' or tangible asset, she says that our shares could become worthless and we would have nothing, whereas even if the property market crashes we would still have the property.

I have tried to point out that the sort of shares we own will never be worthless, but she is stuck on the 'real' aspect of property.

sydboy007 said:

The issue with property is the gearing. Works a treat when the value increases, but not so great if you're getting CPI+ return - think 2.4% + 3.5% NG loss just to break even, let along factoring in you could have been in positive territory with another asset class.

The advantage with shares is you don't have to gear, and should you need some money down the track you can easily sell some. That is difficult to do with property.

Also factoring in the purchase, holding, sale costs of property and it's not pretty.

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Thats what i really wanted the spreadsheet for, my suspicion is that you need to be making a +'ve return on about 105% of the purchase price. This accounts for the cost of finance as well as the opportunity cost on the deposit.

So if you can find a property that is cash-flow positive on 105% of purchase then it will be better than shares because of the gearing, but properties yielding that well are few and far between.

Otherwise you are relying on capital growth and its very hard to see what could drive CG much beyond modest CPI increases so the medium term future looks pretty flat to me.

a very good look at the pros and cons of NG

http://www.businessspectator.com.au...nomy/big-budget-bucks-down-property-drainpipe

galumay said:

Thats what i really wanted the spreadsheet for, my suspicion is that you need to be making a +'ve return on about 105% of the purchase price. This accounts for the cost of finance as well as the opportunity cost on the deposit.

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Current inflation is about 2.4%, from what I read net rental yield is around the 3.5% to 4% mark, so depending on your interest rate you might be facing 5% + 2.4% loss with a net yield of 4% so losing at least 3.4% per year.

I cannot understand why someone wants to have a guaranteed loss every year.

To put that into perspective against an ILD offering CPI + 4% you are some 7.4% behind (less any capital growth) so on 100K investment you are looking at $7400

That's a pretty decent holiday, or a fair chunk of your living expenses. Compound that over 5 or 10 years and it starts to look really nasty.

In such an uncertain economic climate as we face now, I really like the semi guaranteed return of an ILB. Beats inflation and unless the business goes broke you don't have to worry, and if they go broke you're (usually) first in line to get ya money back depending on how far up the capital structure you are - can't go too far wrong with a tier 1 bond.

galumay said:

Thanks, i have used most of your arguments! Her point is that real estate is a 'real' or tangible asset, she says that our shares could become worthless and we would have nothing, whereas even if the property market crashes we would still have the property.

I have tried to point out that the sort of shares we own will never be worthless, but she is stuck on the 'real' aspect of property.

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galumay, it's probably of little help to you, but I've noticed over many years that people who are inexperienced in investing across the asset classes often take this point of view. They can see the property, touch it, they live in a house, so formulate the view that everyone else also needs a house and therefore it's always going to be a profitable asset. Try to explain the cyclical nature of all asset classes and their eyes glaze over.
(This is not at all meant to be demeaning to your wife: she's very typical of probably the majority of the population.)

I had neighbours who - to their great credit - had paid off their home in their mid 30's and bought a couple of investment properties, negatively geared. They kept saying what a great investment property was.
Eventually I asked about the actual return and they quoted a net yield of only about 4% (bank interest was up to 8% at the time), and their capital investment was down about 20%. Yet they still refused to consider diversifying into shares or even some cash reserves.

So there you go. An irrational devotion and belief in property investment which defies all the objective facts at the time.

This brings me to a conversation I had this afternoon with a couple of the same mindset as above and I'd be interested in ASF members' comments about this.

A couple around 60, effectively retired though not of retirement age, therefore unable to draw any government benefits and still paying tax, currently living in a small house (three brms one bathroom, rundown in an unattractive part of town, value around $270,000 at best) sharing with the inlaws, a situation which results in much dissent and unhappiness, have an IP close by, similar standard of dwelling, perhaps $300K value, which they rent out as holiday accommodation. They have said they own both properties but I don't know if any mortgages are attached to either. They claim that the IP is 'hugely profitable' and that rent is around $1000 p.w.
That doesn't sound unreasonable, I guess, for holiday accommodation.

However, when rates (about $3000 p.a.) insurance, maintenance, tax etc is taken into account, the yield is going to be reduced, plus unless they do the constant, arduous cleaning themselves, the cleaning wages are going to be considerable at several times a week x about $40 per hour.

I'm quite out of touch with IP these days and would be interested in others' views about additional expenses or alternatively benefits that would attach to this situation.

The town itself is well and truly in the doldrums, empty shops and stagnant property market.
Despite this, they're now trying to buy another IP an hour or so north.

If it's all so profitable, wouldn't most people be buying their own home to live in rather than endure the stresses of living with apparently cranky inlaws? Maybe I'm missing something important here.
Also, not meaning to make judgements about what's important to other people: maybe they're trying to shore up retirement funds. I just find it an unusual situation.