The future of Australian property prices

[skc]

A good friend has recently purchased her first property :

Inner city 2 bedroom house in Melbourne
Buy price $700k
Stamp Duty $28K
Mortgage Insurance $25K
Other Fees $2K
Loan Amount $650K

LVR 95% Loan repayments of $3.8K per month

Equivalent property to rent : $2.1K per month

Original deposit $90K

Her Salary $120K pa divorced with one child.

Wow. I can't imagine how that works. Income $120k is only ~$88k after tax or $7.3k per month. Loan repayment is over 50% of that, leaving $3.5k to live off. Without knowing anything about her lifestyle - she'd probably spend the majority of that. There's little margin for error (or an interest rate rise). I'd be stressed out in that situation.

She's basically spent 60% of her available equity on fees/one off charges that is un-recoverable. Although I don't know if a margin share portfolio is the right advice - but at least she won't be down 60% straight up.

 

[FxTrader]

I thought this was a " Future of the Property Market " thread , not a Shares Vs Property thread , though I must admit I did raise the share thing , so I shouldn't really complain.

Then don't, you posed a question and I responded. Yes it's off topic to a degree but the modest returns available on property are nicely highlighted by the data provided. It has been a steady rather than stellar asset class.

The price gains and returns related to property in the major metro markets are supported largely on the back of a huge increase in household debt, historically low interest rates and government subsidy to investors who now comprise 40% of the market. These conditions may prevail for some time to come and the astute property investor will still make money but it's a very fragile combination of conditions supporting the property market at present IMO.

 

[See Change]

Then don't, you posed a question and I responded. Yes it's off topic to a degree but the modest returns available on property are nicely highlighted by the data provided. It has been a steady rather than stellar asset class.

But you responded in terms of share vs property . Seem like all the detractors try to shift the arguement , or quote selective examples of times where it didn't work . Would you like be to do that with examples of shares ..... How many thousands of examples could I find ... But that's not the point

I could equally attack shares in terms of what the average person makes from shares , which is bugger , most people loose , but I won't insult your intelligence doing that because I know there are many well informed share investors who make significant profits from shares on an ongoing basis . Hopefully , guys you're in that category .

The whole point of being involved in a forum like this , is not to be average , but to be a well informed investor whether it's in share , property or in business . We've done two subdivisions in sydney and made lots of money doing these , but I'm not here promoting this as a time to do that . It's a specialised area .

If you look at average gross returns , property may well not stack up , but I don't buy average . The reason property works is because you are borrowing most , so the returns are not based on the gross cost .

Timing also has a lot to do with it , and if you get your timing right you will do much better .

I buy bargains when the market has crashed 2009 to now up over 50 % . On 100 borrowings , what the return .... Infinity . Dollar terms 500 k . I'm happy .

I also buy when the market is starting to move as it is now. Ignore it if you want to .

Cliff

 

[sydboy007]

Wow. I can't imagine how that works. Income $120k is only ~$88k after tax or $7.3k per month. Loan repayment is over 50% of that, leaving $3.5k to live off. Without knowing anything about her lifestyle - she'd probably spend the majority of that. There's little margin for error (or an interest rate rise). I'd be stressed out in that situation.

She's basically spent 60% of her available equity on fees/one off charges that is un-recoverable. Although I don't know if a margin share portfolio is the right advice - but at least she won't be down 60% straight up.

Slightly off topic but 3.5K / month is plenty to live on. IT would probably be a rude awakening for her to make the adjustment though. I know I felt the pain for the first couple of years with a mortgage and my situation was a lot better than hers.

I've had some success in convincing friends that property is the risky way to get rich in the current climate, especially when they generally are looking to move further away from work and friends to afford to buy. Once they realise they can achieve the same savings goal, though harder when renting as you can use the money for other things, they do see the benefit of not risking a huge mortgage for 25 years.

 

[skc]

Slightly off topic but 3.5K / month is plenty to live on.

Sure. It all depends on lifestyle, whether she drives to work and if she needs to pay for childcare etc etc.

It is relevant to the property thread I suppose, as banks have in-built assumptions on living costs in determining how much they would lend.

This link has some interesting information on living expenses.

https://www.moneysmart.gov.au/managing-your-money/budgeting/spending/australian-spending-habits

 

[notting]

All I see in the press is 'the press' saying that there is no real housing bubble but it's all you see in "the press."
WTF

 

[FxTrader]

But you responded in terms of share vs property . Seem like all the detractors try to shift the arguement , or quote selective examples of times where it didn't work . Would you like be to do that with examples of shares ..... How many thousands of examples could I find ... But that's not the point...

No, I responded to your spruiking of property (not it's future) here by commenting on just how ordinary the returns are for property based on the data YOU provided. If you're an experienced property investor or developer then no doubt returns can be far above the average.

The whole point of being involved in a forum like this , is not to be average , but to be a well informed investor whether it's in share , property or in business . We've done two subdivisions in sydney and made lots of money doing these , but I'm not here promoting this as a time to do that . It's a specialised area

As you are a recent contributor to this long standing thread, please don't seek to lecture me or others here about what we should be getting out of this forum. This thread is not about past investment glory or titled "How I became a millionare investing the property and how you can too". As you noted it's about the future prospects for property prices based on current evidence, trends and economic conditions to name a few.

You are neither the first nor will you be the last property bull to come here, boast about past success and imply this will continue to infinity. If I thought the prospects for residential property prices were good going forward I would say so but the available evidence suggets to me that the conditions supporting price growth now are precarious at best. I ignore no evidence to the contrary and am watching the property market closely for opportunities.

 

[skc]

All I see in the press is 'the press' saying that there is no real housing bubble but it's all you see in "the press."
WTF

Yes it's a bit worrying. I think it's healthy to have guys like Steve Keen to put out the dooms day warning every 6 weeks or so to tell us that we are in a bubble.

To have consensus that we are NOT in a bubble? That's a strong indication of a bubble!

 

[sydboy007]

http://www.macrobusiness.com.au/2013/10/whos-doing-the-lending/

I wonder where they're getting the money from, or has APRA started to allow overseas borrowing for housing to take off again?

 

[ftw129]

Exactly right Craft, the entrenched interests of property investors in particular are driving the market distorting taxation policies that will ensure a greater proportion of future generations will be forced to rent rather than own.

That would be established residential property, not your generalization. Shares are a form of business ownership, and many businesses produce something for profit that represent productive use of capital that generate economic activity, employment and benefit for society. There is no comparing the increasing profitability of a business and it's increasing share price to the non-productive use of capital deployed in churning established residential property.

My point remains, regardless of the market, the churning of established residential real estate is unproductive use of capital and very costly to society as a whole.

The churning of established residential housing stock at ever higher prices provides little economic benefit while driving up household debt and rents. Such investing is non-productive, an economic burden to society and needs to be curbed.

I ignore no evidence to the contrary and am watching the property market closely for opportunities.

So what is it you're trying to convince everyone of? On one hand residential property should be "curbed" but you're "watching the property market closely for opportunities".

If you want to be taken seriously take a good look at what it is you're trying to say and stop contradicting yourself.

 

[Julia]

Slightly off topic but 3.5K / month is plenty to live on. IT would probably be a rude awakening for her to make the adjustment though. I know I felt the pain for the first couple of years with a mortgage and my situation was a lot better than hers.

Might be plenty for you to live on but you don't know her circumstances and expenses.

Moreover, as satanoperca and DocK have already mentioned, much of a rise in interest rates is going to render her situation impossible. No doubt she is just one example of many in a similar situation.

There's a house here on which I made an offer a couple of years ago. The asking price was about 20% over what was reasonable, but the owner said he 'simply had to get the asking price' because that was what they owe the bank, having borrowed 100% of the cost. It's in a development in a good area, close to the beach and to the CBD, but where the blocks are just 600m and the building covenant dictated large homes.
At the time I made the offer, none of the surrounding blocks had been built on. Now they have. All large houses, as close to the boundary fence as is legal, all with massive skillion roof lines, and the result is a sense of being absolutely shut in and oppressed in the back yard.
So you could deduct at least another 10% because of this.

The owner said, 'oh we thought prices would just keep on going up!"

 

[sydboy007]

So what is it you're trying to convince everyone of? On one hand residential property should be "curbed" but you're "watching the property market closely for opportunities".

If you want to be taken seriously take a good look at what it is you're trying to say and stop contradicting yourself.

I'd say 90%+ on this forum would view property in general - as opposed to very small pockets - as over valued and not worth investing in. The fact that most new investor loans are interest only, and the massive level of NG going on would only confirm this. How long can an asset class continue to make income losses before enough people decide it's not a good investment and the capital growth required to make it worthwhile becomes unlikley enough that you get an increase in sellers?

Now when an asset is overvalued it doesn't mean you ignore it. You'd be wise to keep an eye on it so should the reasons why you don't want to invest in it now change, you can take advantage of that change.

I dare say a lot of us on this forum are surprised the music has continued to play as long as it has. I was sure after the GFC we'd see a decent housing correction, but Rudd kicked in with $20B of cash handouts, and let China opened the debt flood gates which stopped the commodity price free fall. If things get tricky in the next few years neither of those life preservers is going to happen again.

I'll keep saying, why buy when you can borrow housing at below cost? While landlords are blinded by NG and chasing the capital growth dragon renters might as well take advantage of the situation. Sadly with the financial repression ongoing it's difficult to see where else one can put the money, but I'd take a year or 2 of no real returns to the guaranteed losses of property - 5-7 years to break even from what I've read. Long time to have to hold before you can change ya mind without making a loss.

 

[FxTrader]

So what is it you're trying to convince everyone of? On one hand residential property should be "curbed" but you're "watching the property market closely for opportunities".

If you want to be taken seriously take a good look at what it is you're trying to say and stop contradicting yourself.

Trolling again ftw? I have not contradicted myself at all. Your lack of comprehension of my posts aside, what I meant by curbing is capping government subsidized negative gearing on investment property not eliminating it. You seem to imagine that I am some kind of anti-property investment doomsayer and continue posting based on this false premise thinking you are actually making a valid point. Why not post something useful instead of just sniping at posters here on a singular issue of no significance to this topic whatsoever.

 

[ftw129]

Trolling again ftw? I have not contradicted myself at all. Your lack of comprehension of my posts aside, what I meant by curbing is capping government subsidized negative gearing on investment property not eliminating it. You seem to imagine that I am some anti-property investment doomsayer and continue posting based on this false premise thinking you are actually making a valid point. Why not post something useful instead of just sniping at posters here on a sigular issue of no significance to this topic whatsoever.

Haha. I don't know what sort of FXTrader you are but you would certainly make a good politician

You're right, I'm totally focussed at the moment on something slightly off topic but it does bare some significance if you'll let me explain.

I guess for me, growing up with my older brother, we took 2 very different paths. He bought cars and holidays, I bought my first property at 21 and then my second at 25. Our parents, relatives and friends were always in awe of my ability, to save, plan and be very disciplined about the choices I made. To own an "investment property" was seen as something only the rich do. Me, I went out there, with my 37k pa income at the time and showed them how it's done and until this day I enjoy the way people look at me when they find out that I'm 32 and onto my second investment property ready for my third.

We all know that's it's just knowledge and being proactive that enables us to achieve what we want to achieve but for most people they see it all as too hard and would prefer to live for the moment buying lattes and cigarettes.

Anyway, I was raised to believe that property was a symbol of ultimate success. Unfortunately, from people who knew nothing about it but time will tell (lot's of time) if they were wrong.

Reading certain posts in this thread actually opened my eyes up to the fact that perhaps it's not all it's cracked up to be (on a kind of moral level), however I'd be more inclined to believe the rhetoric if those people posting would stand behind what they were saying.

You FXTrader and sydboy007 just happen to be the most recent posters spurting the idea that property is some sort of cancer on the economy (if I've misinterpreted you I apologies but there's been plenty others in here that this applies to) and that the country would be better off without it and yet you're all waiting to jump in and cause the same mess you advocate against... which really kind of pisses me off. I'd have more respect for your opinions if you weren't rubbing your hands together waiting to feed off the system yourselves should it all go to hell for a while...

Anyway, that's what was getting up my nose but I've said my piece. Hopefully I've made a few people think about some of the stuff they are saying on here and think about their true intentions.

I will refrain now from bringing this up again. I realise it is off topic but my thoughts are that even if prices come crashing down all I have to do is hang in there and buy more because even people who have something against investing in residential property will be jumping in and pushing it up again.

The future of Australian property is and always will be, UP

(but hopefully down in the short term so keep talking it down ladies and gents)

 

[moXJO]

A good friend has recently purchased her first property :

Inner city 2 bedroom house in Melbourne
Buy price $700k
Stamp Duty $28K
Mortgage Insurance $25K
Other Fees $2K
Loan Amount $650K

LVR 95% Loan repayments of $3.8K per month

Equivalent property to rent : $2.1K per month

Original deposit $90K

Her Salary $120K pa divorced with one child.



Why did she buy, her family convinced her that it was a good investment. I tried to convince her she was better off with a margin loan + her deposit and build up a share portfolio. But she is convinced her property will double within 10 years.

Her property needs to rise by 10% for to break even if she is forced to sell. When asked could she cope with IR's increasing by 2% she would have to sell. Responsible lending, no. Banks are just drug dealers pushing debt as the new cocaine.

Cheers

How is that property investing?
Thats the same gamble as getting a hot tip on stocks and doing all your dollars. You want dumb investor stories then I have a million and yes you can lose millions in shares off $100s of dollars as was evident from all those people who bought into that QLD company and were then up for paying the dividend.
Secondly I wouldn't really class PPOR as an investment.

Personally if all you think you need to investing in is shares while missing the other investment classes you have rocks in your head. You guys are putting up bad examples to prove a pretty stupid point. Id question if many of you actually have any money behind you.

Imo there is a lot of opportunity across a few areas to make a killing right now. Preaching here is a waste of time.

 

[sydboy007]

I guess for me, growing up with my older brother, we took 2 very different paths. He bought cars and holidays, I bought my first property at 21 and then my second at 25. Our parents, relatives and friends were always in awe of my ability, to save, plan and be very disciplined about the choices I made. To own an "investment property" was seen as something only the rich do. Me, I went out there, with my 37k pa income at the time and showed them how it's done and until this day I enjoy the way people look at me when they find out that I'm 32 and onto my second investment property ready for my third.

So you invested at the begining of the main part of the housing boom and made a lot of money. If you can do the same over the neext 10 years I'll be impressed.

You FXTrader and sydboy007 just happen to be the most recent posters spurting the idea that property is some sort of cancer on the economy (if I've misinterpreted you I apologies but there's been plenty others in here that this applies to) and that the country would be better off without it and yet you're all waiting to jump in and cause the same mess you advocate against... which really kind of pisses me off. I'd have more respect for your opinions if you weren't rubbing your hands together waiting to feed off the system yourselves should it all go to hell for a while...

I'd say judging by the debt levels of a lot of households I might be one of the small percentage left in the country with no debt and able to step in to help stem the potential free fall in housing. Let me say I don't see investment properties as bad but I do see:

* negative gearing on existing properties as a very wasteful subsidy - much cheaper for the Govt to spend $5B a year on building affordable housing

* assets that are cashflow negative as poor investments - just my personal point of view.

If NG was for new properties only, with any losses in excess of the income from rent capitalised onto the purchase price I'd be a lot more supportive of it. Maybe removing the tax free status of the family home and allowing interest deductibility like the USA might be a way forward to stop investors from having such an unfair advantage over home owners, especially FHBs.

The current scenario rewards speculation by reducing the costs of speculation and doubling the rewards with the halving of CGT.

The future of Australian property is and always will be, UP

(but hopefully down in the short term so keep talking it down ladies and gents)

Hopefully that smile of yours means you've said that in jest, otherwise I hope you're not too highly geared with your current IPs.

You only have to look to the USA / Spain / Ireland to see how fast the market can turn.

 

[satanoperca]

How is that property investing?
Thats the same gamble as getting a hot tip on stocks and doing all your dollars. You want dumb investor stories then I have a million and yes you can lose millions in shares off $100s of dollars as was evident from all those people who bought into that QLD company and were then up for paying the dividend.
Secondly I wouldn't really class PPOR as an investment.

Personally if all you think you need to investing in is shares while missing the other investment classes you have rocks in your head. You guys are putting up bad examples to prove a pretty stupid point. Id question if many of you actually have any money behind you.

Imo there is a lot of opportunity across a few areas to make a killing right now. Preaching here is a waste of time.

Take a chill pill buddy. Simply putting up an example of how some perceive they are investing in property and not gambling. I personally see it as silly but hey, I don't go baa baa little black sheep.

Oh and if you see lots of opportunities, cough a few up. Always interested.

And for preaching, I think you just have to look at the Catholic church for that and see how it has turned out.

Cheers

 

[ftw129]

So you invested at the begining of the main part of the housing boom and made a lot of money. If you can do the same over the neext 10 years I'll be impressed.

I hope it didn't come across as though I was trying to brag. This isn't the right crowd I feel comfortable bragging too

But seeing as you did point that out I guess I'd also just like to add that I had no idea how well property was going to do when I bought in. The next 10 years wasn't and still isn't my focus.

10 years went so quickly, you'd be pretty brave to be able to predict what's going to happen in the next 10 years.

40 years was my time frame and now 30.

I'm pretty comfortable with where property will be in 30 years time in Melbourne and Sydney and if I'm wrong, well no one can tell me I didn't try.

Property is a long term investment. It's far too expensive to buy and sell and timing the market has proven to be impossible no matter how much information one has.

Generate cash through work and or trading. Pour that money into property and use it when you're old

 

[tech/a]

You only have to look to the USA / Spain / Ireland to see how fast the market can turn.

Spent plenty of time in all three.
The glut in housing surpasses anything
You'll ever see in Aust.
It will take at least a generation to correct.

Comparing Australia to any one of these three
Is ridiculous.

 

[doctorj]

Spent plenty of time in all three.
The glut in housing surpasses anything
You'll ever see in Aust.
It will take at least a generation to correct.

Comparing Australia to any one of these three
Is ridiculous.

I’m not sure that I’d put all of those in the same bucket. Over construction and over supply was definitely a problem in Ireland, but in Spain I’m not so sure. There are some parts of the Spanish market where that is certainly the case, for example holiday homes by the sea in Andalucía, but I personally think that rising unemployment, prohibitively high taxes and reduced access to mortgage funding plays a much bigger role.

You only need to wander through Barcelona to see the problem. A lot of the bank-foreclosed properties are actually available for rent directly from the bank and appear to be renting quite well. The problem is that people don’t have the money to buy them, because even though banks will offer you a 95% or 100% mortgage to get the NPL off their books, you still need to meet the taxes of 10-15%. For a non-foreclosed property, access to mortgage will be much more difficult as the banks seem to be enforcing much higher standards for credit than they’ve done in the past.

Even if you have the money for the taxes, paying a mortgage is tough without a job, which is an increasing problem in Spain, particularly for the younger cohorts.

The point is, Australia is different, but not totally different. All you need is increasing unemployment and/or a reduced willingness to lend and the impact on demand may overcome the artificially constrained supply that keeps Aussie property prices high.