The future of Australian property prices

[moXJO]

Did I just hear some stupid amount of population growth for NSW on the radio?

Might have to take another look at those properties I thought were to pricey

 

[sydboy007]

I can't believe how many new apartments are going up around me in Erskineville SYDNEY.

We've just got a Woolworths too with apartments above, with another 3 blocks within a 10 min walk from my house mid construction to nearing completion.

It's certainly a lot more vibrant area than when I moved here in 97.

 

[sydboy007]

http://www.thebull.com.au/articles/a/40594-home-equity:-australia's-growing-wealth-divide.html

Some of the more interesting info

Since the Survey of Income and Housing began in 1995, home ownership rates have hovered between 71%-69%, although the proportion of home purchasers (people with mortgages) began to exceed outright home owners in 2004.

While some speculated that Gen Ys were avoiding the responsibilities and commitment of home ownership by choice, a recent survey of Australian university students reveals that home ownership remains an overriding aspiration for younger people. However, affordability (saving a deposit and meeting repayments) is a major concern for these students. Despite relatively bright employment prospects they fear they may never be mortgage free.

Home owners are vastly more wealthy than renters. The latest ABS figures show that the net worth of renter households was on average only about 13% of that enjoyed by owners with no mortgage, and about a fifth of the net worth of home purchasers.

Falling rates of home ownership point to a looming problem. Government expenditure on older people, particularly the relatively low rate for the aged pension, depends on minimal housing costs and the capacity for co-payment (for care) by accessing home equity when the time comes. If older people retire with mortgage debt, and worse, without housing equity, ongoing government obligations for income and housing related payments will rise sharply.

Government subsidies for home ownership (largely through preferential tax treatment) amount to around $8,000 per household per year, but renters get only around $1,000 per year. Support for property investment equates to an additional $4,000. All up, that means in excess of $45 billion for home ownership compared to around $8 billion for renting, including concessions for private landlords through negative gearing.

In 2009/10 only 5.2% of houses sold were affordable to those on lower incomes, and 60% of low-income private renters were in housing stress (when housing costs exceed 30% of income). Overall homelessness has grown 17.3% since 2006, with more than 105,200 Australians sleeping rough, couchsurfing, in crisis or temporary accommodation in 2011.

 

[Whiskers]

Barnaby Joyce has been on about unrestricted foreign ownership of land, particularly by state owned entities, along the same lines as some in Labor and the Greens.

He said on the ABC last night that he's not aware of the FIRB blocking a single deal. That's got to be a concern.

He's got the work ahead of him to get changes made, but I expect he probably will prevail sooner or later. His main concern is from the rural perspective, but he correctly points out that the same principles apply to urban and residential property.

As I understand, foreigners can buy as much land as they like and develop it into housing of various styles subject to FIRB approval, which seems rarely if ever denied. The do not need FIRB approval to sell them. It seems there has been a lot of foreign accumulation of land for some time and likely helped make places like Sydney, Melbourne and Perth relatively expensive on the international affordability index.

If all the political parties keep there word policy wise and Barnaby works up a bit of patriotism on this issue, there is likely to be some further slowing of the economy with further downward pressure on prices.

Foreign invest is generally welcomed, but given Aus had a relatively low savings rate and conversely higher debt... and free or disposable income is key to future growth of the economy... if foreign ownership is artificially forcing up the prices and down the affordability of housing in our own country, surely we must exercise more control than we are at present.

So, just earn more wages you may say. The problem is our economy (and prices) has to grow a bit faster than the norm to cover higher wages. That gets back to the reasons and the terms of reference why our RBA hasn't lowered rates as much as many other countries which has lead to more cash pouring into Aus fuelling the cycle.

There has to be some changes to at least some of the rules with foreign ownership and the RBA... or we will inevitably be priced out of our own land or fall into recession.

 

[sydboy007]

Barnaby Joyce has been on about unrestricted foreign ownership of land, particularly by state owned entities, along the same lines as some in Labor and the Greens.

There's a big difference between buying farm land away from capital cities and land that could be used for housing.

The biggest single factor to make housing more affordable would be basic guidelines (codes) with a right of use implying you can build it as long as it meets the code. No one can challenge the development unless it is outside the code.

Should see a flurry of activity.

A vacant land land tax may also stop the developers from doing so much land banking.

 

[sydboy007]

http://www.macrobusiness.com.au/2013/09/apra-slaps-wrists-as-rbnz-pulls-a-revolver/

Indeed, as we know, investors are at record proportions of lending and data released late last month by APRA suggests that there is a reasonable amount of higher risk lending going, namely:

38.7% of new home loans issued by banks over the June quarter were interest-only;
13.5% of new home loans had a loan-to-value ratio (LVR) of greater than or equal to 90%;
19.2% of new home loans had a LVR of between 80% and 90%;
meaning that 32.7% of total new home loans issued over the June quarter were above 80% LVR.

Seems the specufestors ain't worried about losing their jobs or having issues paying the interest only mortgage.

 

[Whiskers]

There's a big difference between buying farm land away from capital cities and land that could be used for housing.

At the micro level there is, but at the macro the business goal is the same... to profit from Australian resources and take it back to their homeland.

The biggest single factor to make housing more affordable would be basic guidelines (codes) with a right of use implying you can build it as long as it meets the code. No one can challenge the development unless it is outside the code.

Should see a flurry of activity.

The FIRB does ensure foreign investment developments meet all local codes and guidelines, but the problem is these businesses often state owned can afford to land bank, which some have been doing for ages, until the economic conditions are most favourable for bigger profits.

A vacant land land tax may also stop the developers from doing so much land banking.

Nooo... no more new taxes please!

It would also force the unnecessary turnover of land, eg long held family farm land that has become inoperable for any number of reasons including urban encroachment, due to excessive taxes.

However to qualify you comment, the FIRB could enforce a rule that once purchased for (urban development) it must be developed immediately... to stop land banking exploiting our resources for capital gain.

The problem that arises with foreign agribusiness ownership is monopoly or near monopoly control over supply chains.

An issue with rural land is often the foreign ownership is integrated with commercial contracts to solely or preferentially supply the home state or business and 'dump' leftovers in surplus where the decide.

People might recall the Emerald citrus canker outbreak a few years ago where thousands of trees had to be destroyed. It was infected plants brought into a foreign owned orchard without passing through proper quarantine inspection (avoiding inspection costs) that caused that problem.

Some disturbing statistics that you will not see in China or the USA.

• 44 million Ha (11%) of Australian farmland had some degree of foreign ownership
• 10% of water entitlements have foreign ownership
• Grain trading and storage 40-55%
• Dairy processing 50%
• Sugar processing 60%
• Red meat processing 40%
• Vegetable processing foreign dominated
• Pork 25% foreign
• Cotton processing foreign dominated
• Beef feedlots foreign dominated
• Grain/oilseed processing 65-95%

http://www.ioa.uwa.edu.au/__data/assets/pdf_file/0008/2151692/2Mick-Keogh-Keynote-address-slides.pdf

 

[sydboy007]

Some disturbing statistics that you will not see in China or the USA.

• 44 million Ha (11%) of Australian farmland had some degree of foreign ownership
• 10% of water entitlements have foreign ownership
• Grain trading and storage 40-55%
• Dairy processing 50%
• Sugar processing 60%
• Red meat processing 40%
• Vegetable processing foreign dominated
• Pork 25% foreign
• Cotton processing foreign dominated
• Beef feedlots foreign dominated
• Grain/oilseed processing 65-95%

http://www.ioa.uwa.edu.au/__data/assets/pdf_file/0008/2151692/2Mick-Keogh-Keynote-address-slides.pdf

How much of your investible wealth do you have devoted to these sectors? I bought into it via AACO but gave up waiting for it to return anything.

I don't see why a current owner of an asset should not be able to sell to the highest bidder. If a foreigner is willing to pay more then what right do we have to say no you have to accept a lower bid from a local?

Would you be happy for tax payers to fund the difference between a lower local bid and higher foreign bid to keep these assets in local hands because that's the only way I can see it being fair on current owners, and that's a new tax i certainly don't feel like paying.

As for no land tax, it's one of the most efficient taxes. It doesn't distort the allocation of resources nearly as much as most other taxes, and it allows some of the increase in wealth to be recouped by the public when it funds infrastructure rather than the current system that basically benefits those who gain access to the infrastructure. A land tax can help to continually self fund new infrastructure. It would easily replace council rates and other state taxes, and would be a much more reliable revenue base than stamp duties.

 

[Whiskers]

How much of your investible wealth do you have devoted to these sectors?

I was born into and invested most of my life directly in many of these sectors.

I bought into it via AACO but gave up waiting for it to return anything.

Sorry you didn't make a return... but if you know the Holmes a Court family, they (especially the old man, now deceased, Robert) are shrewd business people. The whole idea of public listing was to gain more funds for expansion and development and release some of their private wealth in the business.

However since listing abt 2001 there was severe drought across much of the country, heavy cattle losses from severe floods after the drought broke the live sheep and cattle industry has been belted around with sudden cuts to exports flooding the local market. Not to mention a political agenda that had scant regard for the rural sector.

I don't see why a current owner of an asset should not be able to sell to the highest bidder. If a foreigner is willing to pay more then what right do we have to say no you have to accept a lower bid from a local?

If you look at the world simply as a business to make profits, it would be hard to argue against that. But, the reality there is still a lot of protectionism in some countries that will not allow us to do there what we are blindly or gullibly letting them do here.

Would you be happy for tax payers to fund the difference between a lower local bid and higher foreign bid to keep these assets in local hands because that's the only way I can see it being fair on current owners, and that's a new tax i certainly don't feel like paying.

Tax payers are paying the difference now through increased costs of products derived from them including supermarket products and housing... where the profit is largely taken out of circulation and sent to the homeland rather than substantially returned and recycled to the local economy.

As for no land tax, it's one of the most efficient taxes. It doesn't distort the allocation of resources nearly as much as most other taxes, and it allows some of the increase in wealth to be recouped by the public when it funds infrastructure rather than the current system that basically benefits those who gain access to the infrastructure. A land tax can help to continually self fund new infrastructure. It would easily replace council rates and other state taxes, and would be a much more reliable revenue base than stamp duties.

The short answer here is more is not necessarily better.

I suspect we have a different focus. I'm thinking long term sustainability of key asset and resource regulation as part of keeping our cost of living competitive and modifying our economic model to slow the impact of artificial price stimulus on our economic growth, which lead to the widening affordability issues (by international standards) I mentioned earlier.

 

[Wysiwyg]

If you look at the world simply as a business to make profits, it would be hard to argue against that. But, the reality there is still a lot of protectionism in some countries that will not allow us to do there what we are blindly or gullibly letting them do here.

So true Whiskers. When Asians Google Earth, in Australia they see a vast expanse of 'unutilised' earth. It is "living organism" (human in this context) to seek greener pastures.

 

[sydboy007]

I suspect we have a different focus. I'm thinking long term sustainability of key asset and resource regulation as part of keeping our cost of living competitive and modifying our economic model to slow the impact of artificial price stimulus on our economic growth, which lead to the widening affordability issues (by international standards) I mentioned earlier.

I think we have similar perspectives. I just see artifically trying to keep prices lower as not in the long term best interests of everyone as that just limits future investment. High prices generally work because it encourages extra supply - just look at the iron ore and coal markets.

I do agree we are a lot more open than most countries. It really gawls me everytime I hear China have a hissy fit over FIRB reviewing their investments here when they pretty much don't allow foreign investment in China, except under conditions that benefitt he locals so much I wonder if it's worth the effort. I've read too many storeis of foreigners ending up in jail to have the business they grew with locals stolen from them.

As for housing, I think we lost the plot from the time we started to see shelter as an asset and not a basic human right. How anyone could think the 100% house price inflation from 2000-2004 was in any way good for us, well they have a very different perspective to myself.

I just don't see how we move back from the affordability cliff we're on. Someone has to suffer for housing to become more affordable. Probably a half trillion dollars worth of value needs to be removed from the shelter market to get prices back to where they should be. That wipes out the banks, al levels of Goverment, and a fair chunk of the public.

possibly the safest way is to change NG to apply to only new constructed housng, witht eh Govt using the savings to the budget to directly build affordable housing that they could then onsel at a later stage should the renters workt her way into a position of affordign to buy - similar tothe schee they have in WA.

Even a decade of no real price rices doesn't get us far along in terms of making shelter more affordable

 

[jmoz]

Someone has to suffer for housing to become more affordable. Probably a half trillion dollars worth of value needs to be removed from the shelter market to get prices back to where they should be. That wipes out the banks, al levels of Goverment, and a fair chunk of the public.
(

This is what I can never get my head around. I see some really great arguments around the place as to why we are going to see a 10%/20%/40% drop in property, but the cynic in me always comes back to what government is ever going to throw the opposition that lob and vote themselves out?

with SO many vested interests in the housing sector, shouldn't that mean that its going to be a 'safe' investment for the foreseeable future, as the government/banks etc will always make sure there is a greater fool?

 

[Klogg]

with SO many vested interests in the housing sector, shouldn't that mean that its going to be a 'safe' investment for the foreseeable future, as the government/banks etc will always make sure there is a greater fool?

Yes, until you get an over-riding negative influence (e.g. subprime mortgage crisis) so large that those with self-interests cannot act with the order of magnitude required to negate it.
IMO, it'll continue to be propped up until it can't.

 

[sydboy007]

Yes, until you get an over-riding negative influence (e.g. subprime mortgage crisis) so large that those with self-interests cannot act with the order of magnitude required to negate it.
IMO, it'll continue to be propped up until it can't.

I had started to think things might get tricky next year, but the surprising surge and stabilisation of iron ore at ridiculously profitable levels ($12X when BHP and RIO hcost of production <$45) have, along with the slight fall in the AUD, meant the AUD export price has increased over the last few months.

It will all depend on unemployment and how much fat the landlords have to get through any future downturn without needing to sell the IP or 2. I'm sure the primary residence will remain sacrosanct, but no idea how hard specufestors will fight to keep the IPs? Once sellers outweigh buyers the falls become pretty large and fast.

 

[maffu]

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

I have a spread sheet comparing the rent & buy decision.
It is not very well set out as it was just a solution to a uni question, but it compares the return of renting & investing spare cash flow relative to buying property. It also takes into account if you want to take margin loans in the stock market.
Obviously, the results that you get depend completely on the assumptions you make. If you assume similar returns for Stock and Property investing, property will out perform due to the heavy leverage. If you take historical averages property will outperform a non leveraged stock portfolio, but would be similar to a stock portfolio with a modest margin loan.

I can send it to you if you let me know how.

 

[medicowallet]

I have a spread sheet comparing the rent & buy decision.
It is not very well set out as it was just a solution to a uni question, but it compares the return of renting & investing spare cash flow relative to buying property. It also takes into account if you want to take margin loans in the stock market.
Obviously, the results that you get depend completely on the assumptions you make. If you assume similar returns for Stock and Property investing, property will out perform due to the heavy leverage. If you take historical averages property will outperform a non leveraged stock portfolio, but would be similar to a stock portfolio with a modest margin loan.

I can send it to you if you let me know how.

You are absolutely correct in that it depends on many assumptions.

People often make the mistake of not including

- varying interest rates
- Historical returns compared to the recent past (ie does a recent bull market affect the possibility of returns over the next short to medium term)
- Rates, insurance, replacement of worn out fixtures, maintenance etc (this is where a lot of people fail imo)
- Dollar cost averaging
- Cash flow for opportunities.

and many others.

Then you have the benefits of property which are throughout this monster thread (for me one which is hard to price is the stability you get by not renting)

I cannot see many problems with a PPOR being a semi-priority for young people, even at current ridiculous prices, however to then go and concentrate on IP at the expense of diversification is crazy.

the benefit of going for shares whilst renting instead of a PPOR, well in this case, I think you need a well reasoned suitable alternative (which for me was a business) or some thought of a clear opportunity in the future.

If you think, prepare for the shocks, I don't think many outperform the markets in a great sense, however if I was a young person, I would be quite wary of the current pricing of RE in this country... but then again, I have been saying this for years, and it hasn't come down (but it hasn't really gone up either )

MW

 

[sydboy007]

You are absolutely correct in that it depends on many assumptions.

People often make the mistake of not including

- varying interest rates
- Historical returns compared to the recent past (ie does a recent bull market affect the possibility of returns over the next short to medium term)
- Rates, insurance, replacement of worn out fixtures, maintenance etc (this is where a lot of people fail imo)
- Dollar cost averaging
- Cash flow for opportunities.

I think the biggest thing forgotten is inflation. I'm sick of hearing people, and the MSM, talk about buy a property $150k and selling it 10 years later for $500k and making out it's some amazing great "capital" growth. Once you realise inflation account for around 1/3 of the "growth" the returns don't look quite so hot.

There's a lot of non financial reasons for buying a primary residence, but I often think I could be close to retiring if I'd stayed out of the property market and focused on building up other assets. Rents are just so cheap compared to the value of the property that is being lent to you. Why pay 6%+ of the asset value in holding costs when you can borrow it for around 4%, maybe lower. Investing that 3% differential can pay quite handsomely, with alot less gearing and a lot more mobility to move for employment reasons.

Maybe it's the relief of being debt free, but a 500K mortgage would just scare the bejeezus out of me. Trying to feed that monster for the next 25 years. Nightmare.

The true test of property prices will be when we have our next recession. Personally i think we're already in one. The accounting tricks of net exports showing slightly below trend GDP wont cut it when most people aren't seeing much increase in their income, and most of us are seeing a fall in our real incomes.

Land should not represent over 60% of the value of a home. It's crazy that we've willing allowed ourselves to see artificial scarcity as good for us

 

[moXJO]

Went to an auction today, a house on about 940m2. Older style home but I have been buying in this area as I knew it was going to get rushed pretty soon. I'd be pressed paying $410k for it, but I'm a tight ar$e so $430k would imo been the limit. The first thing I notice is the amount of people there, 40ish which is above normal for this area. The bidding starts at 400 and quickly goes to 450 (young couple in their twenties) they eventually go to market at $460k. Really that was $60k over what I would be willing to pay, lucky I have a back up down the road. I drive down to a pair of shops on a block 700m2 and that has a sold sticker on it as well.
The agents know the market is heating up as well as they no longer give me the time of day on the low ball offers. Right now its a sellers market.
The sentiment between now and the beginning of last year is chalk and cheese. Might have a lot to do with booting out labor. Its like everyone decided its time to get back to work.

The true test of property prices will be when we have our next recession. Personally i think we're already in one. The accounting tricks of net exports showing slightly below trend GDP wont cut it when most people aren't seeing much increase in their income, and most of us are seeing a fall in our real incomes.

I think we have already had one, conditions on the ground are improving. Business I am talking to have seen a pickup in the last few weeks and friends in Sydney are flat out. I know its not the big picture or hard numbers but things do seem to be picking up.

I think a heating up economy and interest rates will be interesting.

 

[ftw129]

 

[Bill M]

From The Daily Telegraph

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Sydney property prices will increase by up to 20 per cent next year, report predicts

Sydney property prices will boom by 15-20 per cent in 2014, leading an accelerated national housing recovery, according to a forecast released today.

Full Story Here: http://www.dailytelegraph.com.au/realestate/news/sydney-property-prices-will-increase-by-up-to-20-per-cent-next-year-report-predicts/story-fni0cly6-1226721103566
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