The future of Australian property prices

[See Change]

and the LAFHA {living away from home allowance has been abolished.}

.

I must admit the effect of this has been tragic , especially on those poor people who own Sydney water front properties as the massive number of Senior Executives who rely on the LAFHA to afford these waterfront mansions opted for cheaper accomodation

This market certainly did come back and until recently you could buy good Waterfront properties in Sydney for down to 4 mill. Sadly I couldn't afford one . THey have started moving as people see this represents good value.

There was / is townhouse for sale on the waterfront in Seaforth recently in the 2 mill's which sounded quite good value.

Luckily this factor didn't seem to affect anyone else

cliff

 

[moXJO]

All I can say is prices are jumping a fair bit and Im getting out bid on a lot of the houses Ive been lookin at. Must be time to develop and sell.

 

[sydboy007]

It was.



sydboy007, I'm just trying to figure out what you're (and a few others) intentions are. You play the violin for the poor regular Aussie battler that just wants to put a roof over their heads for their family yet you openly admit you'll happily participate in the exact same thing that you're preaching against.

What exactly are you trying to achieve here?

I have my own home so not that interested in more property. Over the last year I've read a lot and started to change my attitude towards good corporate bonds. They wont shoot that stars out, but do provide a reasonable stable income year in year out.

I do feel sorry for those younger than me (I'm 41) that weren't able to buy at reasonable price like I did, and there's many factor to it, the worst probably being the very strict planning laws we have here and the way those in a suburb will do their best to repress new development. I look at how much more 'vibrant" and liveable my area has become with the building of small 3 storey apartment blocks. Erskineville village is quite a nice place these days, but 10 years ago it was half boarded shops for lease. The initial negative reaction from some of the house owners around me was your typical NIMBYism. I had no problem with it, especially since they were converting semi derelict warehouse and old electricity substation buildings. It's probably good for the environment too since a majority of these people work in the CBD or near by.

I'd say if we do hit a recession and most asset classes go to poo, I'd be more interested in buying stocks or bonds at cheap prices than property. Why? Because when i bought my house in 97 I sold 40K of shares to help fund the purchase. Those shares would be worth around the 280-300K mark, not including all the dividends they'd have paid me over that period. Throw in the extra money I'd have been saving and the return would have been far better than from my house. Property is a big illiquid asset that's expensive to buy and sell. It makes up too much of my personal wealth so until I have a diversity of wealth I really don't see myself buying more of it.

I don't think I'm participating in what I'm preaching against. At the moment i think most of the people who are buying investment properties, and most buying a family home, are specufestors. Their hope is that somehow the real growth in prices will continue, yet we've had nigh on 20 years of real growth, most of it above the rate of income growth. So how long can a certain asset class increase in value more than incomes before no one can afford to buy it, or it's just a pass the parcel amongst those who can with the last one holding the exploding bomb?

I can't believe people are still buying with gusto now, especially when i think it's more likely unemployment is going to be higher next year than it is now, where the free income kick from rising commodity prices is going into reverse and likely to take another 20% or so from us, where boomer reitrements start to shift the demographics against housing.

The tax system in Australia has perverted the way we see property. Most IP holders only talk about the negative gearing benefits, yet have trouble quantifying the annual cost of the property, and rarely do I hear them mention inflation. Most seem to actively try to filter out when I say if you loose 1.5% to NG and inflation is 2.5% then you need to make 4-5% a year in capital growth just to stay even after maintenance costs are factored in. To me that's not an investment, that speculation. Generally an asset is worth the income it can produce, though (artificial) scarcity can drive the value up.

I'm sure some will stay make money out of property, kudos to them, but in general terms I don't see it turning out well for the majority who are highly geared into property. Not when debt levels have barely retreated since the GFC.

 

[ftw129]

sydboy007,

Firstly, thank you for your detailed response but I don't know if you don't understand what I'm trying to point out or if I'm not making myself clear.

You have clearly illustrated in many ways how you disapprove of the family home being used as an investment vehicle to profit off (I can't be bothered finding the many many ways in which you've expressed this) but then when asked if you would participate in the next cycle should there be a significant pull back then you admit that you would.

Would I be tempted to invest in property if prices fell? They'd have to at least halve and then it would depend on what the yield was with that scenario playing out.

Do you not see the contradiction?

(At least you seem to be honest. I wonder if any of the others here that see residential property investment as some sort of cancer on society are willing to admit that they will take full advantage of the situation should some sort of crash occur and their "guidelines" for the "right" returns are met?)

 

[joku]

I wonder if any of the others here that see residential property investment as some sort of cancer on society are willing to admit that they will take full advantage of the situation should some sort of crash occur and their "guidelines" for the "right" returns are met?)

There are plenty of people with that exact view, it's just a minority. I'd argue more people would agree with it if they knew more and weren't blinded by greed. It's not up to us as individuals to withdraw participation where we see flaws in a free market system. It's up to government to fix government policy failure. Whether it is by rolling back tax perks or just putting a limit on the number of residential properties an individual can own or whatever other effective method I don't really care. I can't see it happening though. We're too far down the track, and government these days is too busy fussing over short-term non-fundamental issues like creating jobs regardless of their benefit to society and increasing GDP... which is what gets us in messes like this in the first place.

 

[Smurf1976]

Just about every problem we have today, economic, social, strategic and environmental, has short term thinking as its' ultimate cause.

The trouble with spending, using up, selling off etc everything now is that tomorrow does come.

If you measure wealth in real, physical terms rather than fiat money then it seems that we are slowly but surely going broke. A generation ago, Australia had the ability to manufacture just about everything we needed. Homes were either owned outright, or with relatively modest (relative to income) money borrowed from the bank. Public utilities were in public ownership and so on.

Now we have foreigners owning, via mortgages, much of the same housing we already had. In effect, as a nation we simply borrowed a lot of money from overseas, backed it with the same houses we already had, then spent that money on something else (consumption). In a broad sense, that's what we've done - borrowed a heap of money and spent it in order to obtain, well, not much at all. It's much the same with governments too. They sold the railways, buses, power stations and even office buildings to "private" owners who, it turns out, are quite often foreign governments and thus not "private" at all. Now the money has been spent, debts are soaring and we're in a far worse position than we were previously. The debt is back but we no longer have the physical assets we had previously.

All of this comes down to short term thinking. GDP may well be going up, but it is doing so largely because we keep exporting our real, tangible wealth in order to fund consumption. That must surely end at some point and future generations won't thank us that's for sure.

 

[sydboy007]

Just about every problem we have today, economic, social, strategic and environmental, has short term thinking as its' ultimate cause.

We can see this with the loss of oil refinery in the country. The way we're going we wont even be able to make a subsidence level of petroleum products. Just imagine going to war and not being able to fuel your army let alone the productive capacity of the country.

When I look at the debt bindge we went on after the financial deregulation of the 80s, I do wonder if it was a good thing for us. We might feel richer, GDP is "bigger" and we can stand proud to be one of the largest economies in the world, but it's built on a mountain of debt.

I doubt things will change unless we change the tax system and stop making the family home some sacrosanct tax shelter.

Our political parties are more interested in getting into power than tackling the problems we face. It grates on me that they never mention the demographic headwinds. I've read articles that estimate properties prices are about 30% above what they would be due to the boomer population bulge, so with the increase in the dependency ration we're now facing a lot of that 30% is likely to be given up over the coming decades.

 

[young-gun]

AS pointed out , prices go up because demand outstrips supply . Free market economics 101 . I'm surprised someone on a share forum needs to ask that .....

Was really more of a rhetorical question, but thanks so much for the clarification.

If as you suggest , the majority of people expect this ( however wrong you may feel they are ) then in all likelhood it's going to happen .

People have 'expected' prices to always go up in other countries too.

People are paying more for properties because they can afford too....

Which brings me back to, where are these people coming from? You boomers are leveraged to the hilt, there is only so much more debt the ignorant ones can take on, not to mention theyll be shifting into retirement soon. Most in my generation cant afford to purchase to push prices higher. Gen X is smaller than the boomers also.

Marching with their eyes closed . Yes ,there are many people doing that . I'm not . During the last boom I sold down many of the properties so when the GFC hit I had an LVR of around 15 % . When the GFC hit we were able to make cash offers to people who hadn't been that prudent.

You seem to think property is on it's way to higher highs and more golden days, I'd say you have at least one eye closed. Also when you are dealing with 85% cash it removes a lot the major risk of a crash, would you care to start your property investing gig again today with say 10% of a property you desire? Plus the cash for stamp duty of course.

Was it Buffet who said that wealth creation is the the transfer of money from the impatient to the patient . I'm patient . The business cycle is a reality and I'm happy to take advantage of it.

Don't know, I'm not a big fan of buffett.

There will be another slump at the end of the next cycle . I'll be surprised if it's 40 % , but if it is I'll be on the sidelines waiting to buy.

Currently the world economy is getting back on track and I don't expect the next slump for a while . By then I'll be debt free or with a very low LVR and bullet proof .

Now I know for certain, you are just trolling.

In terms of a property bubble , as said my observations are the Sydney , which is the only hot market in australia at the moment is leading the charge , but has only recently set new highs .

What does the the RBA say ?

Last week, the Reserve Bank hosed down fears of a bubble as ''unrealistically alarmist'', saying prices were rising in line with incomes over the past decade

Great news, and right on cue might I add. Was it 2? or 3? months before Fed Res chairman Ben bernanke said that there was most definitely not a housing bubble, only to see it completely collapse?

I'm glad that house prices are in step with incomes. That must be how the median got to 6 times the average income instead of 3.

A two year time frame is fine by me ( any times ok actually ) . By then I'll have a low debt level and be looking for my next opportunity.

If that's all you need you may be ok. If we aren't in a bubble now low rates will see that we will be. Hard for people to identify a bubble until it's burst sometimes.

I'm not a fence sitter on property. I'm out. I know I know, I'm missing out on the opportunities of a life time.

 

[sydboy007]

move along people, there's nothing to see here. Hockey and Abbott would see rising property prices just one of the things to return them to the Golden Howard years.

From the AFR:

Treasurer Joe Hockey told reporters in Canberra that he was not worried about a housing bubble and rising prices should help generate new construction.

“The most important point at this stage is that there is confidence back in the real estate market in Australia,” Mr Hockey said.

“Rising house prices actually help to make marginal property development viable. And there is a shortage of supply out there and what this will do is make supply more readily available.”

Mr Abbott also welcomed rising property prices.

“Don’t forget … if housing prices go up, sure that makes it harder to get into the market, but it also means that everyone who is in the market has a more valuable asset,” he said…

“I would be confident that the Reserve has got its eye on housing prices and will appropriately manage the level of interest rates.€

 

[Bill M]

You boomers are leveraged to the hilt, there is only so much more debt the ignorant ones can take on, not to mention theyll be shifting into retirement soon.

Steady on Pal, I and a lot of my friends are boomers. I do not have even 1 cent of debt, totally debt free and so are most of my boomer mates. Shifting into retirement, yes we are but most of us enjoy the steady rental income that we receive. The same old question comes up with my boomer mates. It is, if I sell now what will I do with the money that can give me the same return on our long held IP's? Cash? 3% Term Deposits 4%. Shares? In retirement? Good luck with that, we do not want to lose our capital under any circumstances. (Super Funds are only just breaking even after 5 years). And as we debate it over a beer in the RSL club we just nod our heads and say, I'll just leave it where it is.

 

[medicowallet]

Just about every problem we have today, economic, social, strategic and environmental, has short term thinking as its' ultimate cause.

The trouble with spending, using up, selling off etc everything now is that tomorrow does come.

If you measure wealth in real, physical terms rather than fiat money then it seems that we are slowly but surely going broke. A generation ago, Australia had the ability to manufacture just about everything we needed. Homes were either owned outright, or with relatively modest (relative to income) money borrowed from the bank. Public utilities were in public ownership and so on.

Now we have foreigners owning, via mortgages, much of the same housing we already had. In effect, as a nation we simply borrowed a lot of money from overseas, backed it with the same houses we already had, then spent that money on something else (consumption). In a broad sense, that's what we've done - borrowed a heap of money and spent it in order to obtain, well, not much at all. It's much the same with governments too. They sold the railways, buses, power stations and even office buildings to "private" owners who, it turns out, are quite often foreign governments and thus not "private" at all. Now the money has been spent, debts are soaring and we're in a far worse position than we were previously. The debt is back but we no longer have the physical assets we had previously.

All of this comes down to short term thinking. GDP may well be going up, but it is doing so largely because we keep exporting our real, tangible wealth in order to fund consumption. That must surely end at some point and future generations won't thank us that's for sure.

I would like to buy you a virtual beer : :drink:

If only people realised how stupid we are!

MW

 

[young-gun]

Steady on Pal, I and a lot of my friends are boomers. I do not have even 1 cent of debt, totally debt free and so are most of my boomer mates. Shifting into retirement, yes we are but most of us enjoy the steady rental income that we receive. The same old question comes up with my boomer mates. It is, if I sell now what will I do with the money that can give me the same return on our long held IP's? Cash? 3% Term Deposits 4%. Shares? In retirement? Good luck with that, we do not want to lose our capital under any circumstances. (Super Funds are only just breaking even after 5 years). And as we debate it over a beer in the RSL club we just nod our heads and say, I'll just leave it where it is.

Sorry I wasn't generalising or hinting that cliff is up to his eye balls in debt. But fact is a lot are. Not everyone cares nor do they understand or even think about the few things you outlibe above.

If I was a boomerwith little debt of course id hold all my properties also. My arguement has always been that it makes little sense to START at this point in time. Which would require loading up on debt with poor returns.

 

[See Change]

Sorry I wasn't generalising or hinting that cliff is up to his eye balls in debt. But fact is a lot are. Not everyone cares nor do they understand or even think about the few things you outlibe above.

If I was a boomerwith little debt of course id hold all my properties also. My arguement has always been that it makes little sense to START at this point in time. Which would require loading up on debt with poor returns.

Wouldn't say up to eye balls , but geared up more than was pre GFC . At that stage LVR was around 15 % , now up to around 65 % and the gross value of our portfolio has around tripled .

So how do you get debt free ? You can pay it down with rent and wage .... Very slow process , or you can sell properties and use the capital gain to pay off the remaining properties . This is part of the reason we've geared up .

Actually I think now is a good time to start , if you haven't already started .

The returns come from the capital gain . Will be interesting to see who is right .

Cliff

 

[13ugs13unny]

Sorry I wasn't generalising or hinting that cliff is up to his eye balls in debt. But fact is a lot are. Not everyone cares nor do they understand or even think about the few things you outlibe above.

If I was a boomer with little debt of course id hold all my properties also. My arguement has always been that it makes little sense to START at this point in time. Which would require loading up on debt with poor returns.

And there it is.

You can easily make out by the comments how the generational divides are getting so much wider, between Xgeners like me and baby boomers and Ygeners, cliff was mentioning water front properties in Sydney before , probably afforded by 1% of the population which doesn't relate to any general consensus in regards to property anywhere else in Australia. Certainly a bridge too far for young gun.

The issue with the older posters here including myself is that we run the risk of the rug being pulled from under our feet by the younger generation that as young gun clearly states to the effect there is no point saddling up debt for the younger generation.

Property is a long term generational transfer of tangible type of asset -monetary or inheritance. If Xgeners don't buy from the boomers, and Ygeners don't take the first step, then I don't see a bullish property market. That is still my view. Why?

Because when Ygeners read jobs being out sourced overseas it doesn't give them job security therefore comfort, just one of a plethora of reasons too many to mention here.

X-geners I think can see both sides of the generational divide and become more conservative, instead of being mildly confident, I see X-geners as cautiously realistic and bearish.

Baby boomers passing their 60's and heading into retirement want and require and the property boom to continue sky-rocketing prices to give them their golden parachute to head into a comfy retirement, that requires previous generations to saddle up with often debt that is over 10 times the average annual salary and was unreasonably climbing some time ago.

Many baby boomer's expect property prices to double every 10 years or so but don't understand the basic The law of exponential function http://www.youtube.com/watch?v=LqcHG7QUK9k

Better see the you tube video by respected Dr Barlett, I think anyone considering getting into any sort of property should know this before buying.

My take on property is that people these days have unrealistic expectations, and as a xgener I would have to agree with young gun's point of view. There simply is no point being saddled with heavy unreasonable debt.

I think the low interest rates are trying to bridge the generational gaps to transfer property by saddling up X & Y geners will more debt, {on the promise property prices will rise and double every 10 years or so} but how long will the lower rates last when saddled debt in excess on 500k to up to 5m and more for some changes drastically when interest climbs just 25 basis points & when it rises in multiples of 25 basis points?

That's where it will sting. I don't think baby boomers trashing individual comments made by xgeners or y-geners is helping either as I think they are genuine concerns, and negative re-enforcement divides the generations further. Therefore I don't believe their will be another property boom like the aberration we had last decade, as the different generations are further apart than ever in their point of views.

 

[See Change]

BB

I'm happy to leave you with your vision property investing as some sort of tool the evil Baby Boomers use to repress the following generations . Obviously your not going to change your views and you have a nice little group of fellow true believers who congratulate you when you take things out of context and ignore other things .

Property investing is another tool for wealth creation that is available for any one who wants to use it . In the last few years I have seen people from all generations create wealth from investing in property . Just from people I know personally , I know two people in their 20's get to the point where they had signicant financial freedom . One paid cash for a house in Sydney's northern beaches , so it is not just BB' s who can and do benifit. My daughter , 24 , has just bought her first investment property and is looking forward to buying her second .

I wish you happiness along your journey.

Cliff

 

[moXJO]

I have been looking in some of the lower priced suburbs I had listed to see how they had been moving and all seem to have jumped beyond what I would be willing to pay. I was looking in these areas 1-2 years back with the streets I was looking at coming in around $240k for 3 bed. It's all over $320k now for similar properties. While I think prices will come back eventually, it has jumped a fair bit and the market is moving and selling. Everyone is back to selling at auction.
The doomers (which I was one a few years back) on here have been that wrong regarding property and making money that its become a bit of a joke. In fact doing the exact opposite when doomers are at their peak are a good money spinner.

 

[See Change]

I have been looking in some of the lower priced suburbs I had listed to see how they had been moving and all seem to have jumped beyond what I would be willing to pay. I was looking in these areas 1-2 years back with the streets I was looking at coming in around $240k for 3 bed. It's all over $320k now for similar properties. While I think prices will come back eventually, it has jumped a fair bit and the market is moving and selling. Everyone is back to selling at auction.
.

Hi MO

Sounds like its western sydney ? Correct . Every one has been surprised by the strength out there , including me .

I wouldn't hold my breath waiting for it to come down . It's called a property boom . I've seen several and they don't come back to where they started other wise I could still buy my parents house in warrawee for 25 k ....

There are some people I know who are still looking to buy , but most are happy to sit back and watch the growth and buy some where that isn't quite as hot.

Cliff

 

[13ugs13unny]

BB

I'm happy to leave you with your vision property investing as some sort of tool the evil Baby Boomers use to repress the following generations .
Cliff

Cliff, pour scorn over my opinion if you wish, as you do to most other opinions on here furthermore your mistaken in the way you interpreted my opinion, based on the generational divides & understanding the exponential functions.

However if you believe most of Australia is based on your reality of "home & away" Sydney's northern beaches, then its too removed from the average citizen of this country IMHO. Probably a symptom of never having lived in many states or experienced anything outside your idyllic lifestyle.

Your entitled to your point of view but don't be disrespectful by trashing someone else for their point of view by installing something or interpreting outside what was actually stated.

 

[Smurf1976]

For any economic activity to be sustainable, it must have an ongoing supply of the key ingredients.

If you want to make steel (for example) then you need iron ore, coal and ferro alloys. Without those you don't have steel. So it's no surprise to find that of the two operating steel works in Australia, one is in SA near a source of iron ore, the other is in NSW near a source of coal and both are within reasonable shipping distance of the TEMCO plant in Tas which produces ferro alloys. And the reason TEMCO is in Tas is because making those alloys needs lots of electricity, hence it was built in a place where that is available.

If you want to make paper then you need wood, power and quite a lot of water. Hence we built paper mills at sites near forests where water and power are also available. Nobody would built a paper mill at Alice Springs, for example, since the required resources aren't available.

Or for something like running concerts you need a large population base within reasonable travelling distance, somewhere to host the event and supporting infrastructure including transport, hotels and the like. Hence concert tours generally go only to Brisbane, Sydney, Melbourne and sometimes Adelaide and Perth where the required inputs are available. It's just not viable to take a major festival or concert tour to somewhere like Port Lincoln or Mt Isa, since the required inputs don't exist in those places.

House prices? Well the key things there are population and access to money. Without both of those, you don't have high house prices given that the supply of housing can (and is being) increased. It's not as though it's a rare and finite commodity - there's plenty of land and building materials available.

Population is growing that is true. But where is the money coming from? Wages aren't doubling every 10 years that's for sure. An individual might move from flipping burgers to manual work to a trade or profession and then onto management, increasing their income at each step but this does not hold true for the population as a whole since there is a limited need for higher paid positions in the economy.

That leaves credit growth as the fuel for house prices. So long as a worker on average earnings can borrow ever increasing amounts of money, supported by declining interest rates, then the fuel is there for rising house prices. But, and here's the problem, interest rates are highly unlikely to keep falling forever. Whilst they are officially set by the RBA, the reality is that the RBA has a limited window in which to operate and this is determined by international factors. If interest rates rise globally, then there's little choice other than for the RBA to follow suit in due course.

So at some point the downward tend in interest rates must end, and at that point the game is over for real house price growth unless a wages boom comes to the rescue. Just as a steel works can't continue to operate if the coal runs out, so too house prices need ongoing access to their fuel if they are to continue to rise.

When it will happen is anyone's guess. But with the RBA cash rate at 2.5%, mortgage rates around 5% and official inflation at 2.4% there isn't a lot of room to move going forward. At the extreme, if the RBA cut rates to zero, that only halves the mortgage rate. More realistically, if we assume that the RBA doesn't go below 1% on account of the other issues that would entail, mortgage rates aren't going to drop more than about a third from where they are now. A one third drop in interest rates, that's roughly a 50% rise in the amount someone can borrow, is about as far as it can realistically go.

50% is of course significant growth, but it doesn't keep the game going beyond a few more years at most. And then, at some point, interest rates go back up. That's when the real trouble starts, when the fuel supply for house prices not only stops growing but actually goes into reverse. When is anyone's guess, but it will surely happen at some point.

At best, it's plausible that we see a prolonged period of house price stagnation as falling interest rates are replaced by wages growth. A sort of "muddle through" situation which eventually takes us back to higher interest rates and house prices as a lower multiple of income. But it's being somewhat optimistic to expect such a smooth transition, and even this optimistic scenario doesn't involve rapidly rising house prices.

At a broader level, it's ridiculous that Australia is apparently unwilling to invest sufficiently in everything from education to infrastructure to manufacturing and yet we're more than happy to borrow a fortune from overseas in order to change the nominal owner of the houses we already have. We're borrowing $ billions, just to change names on a piece of paper. That's not rational.

 

[medicowallet]

Cliff, pour scorn over my opinion if you wish, as you do to most other opinions on here furthermore your mistaken in the way you interpreted my opinion, based on the generational divides & understanding the exponential functions.

However if you believe most of Australia is based on your reality of "home & away" Sydney's northern beaches, then its too removed from the average citizen of this country IMHO. Probably a symptom of never having lived in many states or experienced anything outside your idyllic lifestyle.

Your entitled to your point of view but don't be disrespectful by trashing someone else for their point of view by installing something or interpreting outside what was actually stated.

The problem is that some of my fellow older posters on here actually believe that they had it tougher than the young people, which is a load of rubbish, generated by their feeling of self importance (something I regularly indulge in)

It was quite reasonable for a low-mid income earner to pay off a house on single income, supporting a family only 30 years ago, and now, that is impossible... and by house I mean a house, not some dog box single bed unit that some here will spurt out as an option.

I am happy, I have made my money. I am disappointed by the attitudes of some of the people in my generation who are quite happy to accept the "luck" when it came to property, and condemn the younger generations to a period of massive sacrifice, as we will control the vote, and we know it.

Sad times.

MW