The future of Australian property prices

sptrawler · 9 February 2014

cynic said:
I'm not sure that you've understood what I am driving at!

Remember that mean wages were much lower and interest rates were triple what they are today!!

Yes, and I borrowed and am where I am today?
Interest rates were high, but house prices were low and you could negative gear the loses.

trainspotter · 9 February 2014

banco said:
Given neither of you have responded substantively to the point I made I guess calling me impolite is the best you can do.

Go and do some research ... I will be waiting for your substantive response. And your point exactly is what again? Both Bill M and myself have the experience to back up what we are typing ... can you claim the same?

trainspotter · 9 February 2014

sptrawler said:
Yes, and I borrowed and am where I am today?
Interest rates were high, but house prices were low and you could negative gear the loses.

Still can negative gear last time I looked? Lead a horse to water and all that stuff. Good night folks ... sleep well under the roof you have over your head whether it be a PPOR or an IP or a rental .... you know who you are ... cardboard box anyone?

cynic · 10 February 2014

sptrawler said:
Yes, and I borrowed and am where I am today?
...

As did I, despite losing my job in "the recession we had to have".
Negative gearing is only useful if there is actually some income to gear against!

sptrawler · 10 February 2014

cynic said:
As did I, despite losing my job in "the recession we had to have".
Negative gearing is only useful if there is actually some income to gear against!

Never been a problem getting tenants, just getting good tenants is the key.
Also as average rents increase well above what can be met by the average wage, the problem becomes more acute.
That is unless the government keeps propping up your gamble on prices.?

Heads you win tails you lose.

Joe Blow · 10 February 2014

banco said:
Here is a tip for you and the other old coot Bill M.

I understand that sometimes debates can get frustrating and a little heated, but insults never help. It's better to agree to disagree when you cannot find any common ground rather than start throwing around insults and personal attacks, which serve no purpose other than to inflame the situation.

Let's keep it civil please.

Smurf1976 · 10 February 2014

cynic said:
Would anyone here be willing to pay 1990's real estate prices at 1990's interest rates whilst earning 1990's wages?

I'd do it in an instant. Most costs roughly the same as today relative to wages (notable exception of electronics) and houses a lot cheaper. It was a much better deal back then for first home buyers than it is today that's for sure. Well, it is unless someone is expecting 7% or so per annum wages growth (in the same job) and a decent fall in interest rates from this point.

Smurf1976 · 10 February 2014

cynic said:
Remember that mean wages were much lower and interest rates were triple what they are today!!

Relative to house prices, mean wages 15 years ago were literally double what they are today and were followed by moderate growth in nominal wages, plus large falls in interest rates. All of which makes for a very cheap house purchase compared to the situation now.

I'm not going to enter any personal disputes, but it does amaze me how many struggle with a basic fact. Relative to average wages, houses today are double the price they were in the 1990's.

If petrol cost $3 per litre or if the price of bread doubled then many would be saying plenty about that, and yet petrol and bread are minor costs compared to housing for most people.

The rise in house prices has done nothing of real benefit to society so far as I can tell. All it's done is transfer wealth from those buying to those selling. In general, that's a transfer from the young to the old. Someone today, has to work twice as long to buy the exact same house someone bought 20 years ago and I don't see that as a benefit.

cynic · 10 February 2014

Smurf1976 said:
I'd do it in an instant. Most costs roughly the same as today relative to wages (notable exception of electronics) and houses a lot cheaper. It was a much better deal back then for first home buyers than it is today that's for sure. Well, it is unless someone is expecting 7% or so per annum wages growth (in the same job) and a decent fall in interest rates from this point.

It's funny that you believe that. There were times when the interest bill on my PPOR substantially exceeded my annual income! It was little short of a miracle in financial alchemy that enabled me to retain ownership!

If I'd bought and mortgaged the same house at today's prices and interest rates, unemployment benefits alone would cover more than 80% of the mortgage payments and council rates. The same could not be said for 1990! My monthly interest bill alone was more than double my unemployment benefit!

Klogg · 10 February 2014

trainspotter said:
Both Bill M and myself have the experience to back up what we are typing ... can you claim the same?

Hume's problem of induction at its best

craft · 10 February 2014

In aggregate terms today’s interest burden at record low interest rates is about the same as the interest burden early 90’s when interest rates were record high.

Risks at high interest rate are on the upside if rates fall.
Risks at low interest rates are on the downside if rates rise.
The risk equation has reversed.

I don’t know when or what will happen to house prices (especially as there is so much political intervention in the area) but they are a big risk to the economy at current levels given the amount of private debt secured against them.

triggers?

A slowing of national income from falling resource prices will put pressure on household income – particularly those that succumb to a rising unemployment level.

Imported inflation from a devaluing currency will put upward pressure on interest rates.

Younger generations have legitimate gripes over current political housing policies and their angst will eventually find political voice as voting power shifts.

sptrawler · 10 February 2014

craft said:
View attachment 56750

In aggregate terms today’s interest burden at record low interest rates is about the same as the interest burden early 90’s when interest rates were record high.

Risks at high interest rate are on the upside if rates fall.
Risks at low interest rates are on the downside if rates rise.
The risk equation has reversed.

I don’t know when or what will happen to house prices (especially as there is so much political intervention in the area) but they are a big risk to the economy at current levels given the amount of private debt secured against them.

triggers?

A slowing of national income from falling resource prices will put pressure on household income – particularly those that succumb to a rising unemployment level.

Imported inflation from a devaluing currency will put upward pressure on interest rates.

Younger generations have legitimate gripes over current political housing policies and their angst will eventually find political voice as voting power shifts.

Great post craft, captured it perfectly

trainspotter · 10 February 2014

Klogg said:
Hume's problem of induction at its best

Ermmmmmmmm NO ! Hume's Problem of Induction goes something like this:-

We naturally reason inductively: We use experience (or evidence from the senses) to ground beliefs we have about things we haven't observed.

As both Bill M and myself have observed and are using our experience to comment then Humes theory is not applicable.

Essentially, the principle of induction teaches us that we can predict the future based on what has happened in the past, which we cannot. Hume argues that in the absence of real knowledge of the nature of the connection between events, we cannot adequately justify inductive assumptions.

Price-to-income ratios are often used in isolation to assess ‘affordability’, that is, to assess how easily a typical household can purchase a typical dwelling. However, this only makes sense if other factors affecting borrowing capacity are unchanged. As borrowing capacity increases, households have greater ability to purchase housing and so prices can be bid up more than the increase in incomes. So in this case, higher price-to-income ratios do not imply less affordable housing, but are a consequence of households’ greater ability to pay for housing.

http://www.rba.gov.au/publications/bulletin/2012/dec/pdf/bu-1212-2.pdf

Or does the RBA have it wrong as well ?

I am off to stock up on cardboard boxes

Ves · 10 February 2014

From Wiki:

The problem of induction is the philosophical question of whether inductive reasoning leads to knowledge understood in the classic philosophical sense, since it focuses on the lack of justification for either:

Generalizing about the properties of a class of objects based on some number of observations of particular instances of that class (for example, the inference that "all swans we have seen are white, and therefore all swans are white", before the discovery of black swans) or

Presupposing that a sequence of events in the future will occur as it always has in the past (for example, that the laws of physics will hold as they have always been observed to hold). Hume called this the principle of uniformity of nature.

Hume is not saying that induction cannot be useful, he is saying that there is no logical justification for it because the connection between the empirical observation and the prediction about another event cannot be shown via (deductive) reason.

It could be argued that Hume was saying that we cannot claim empirical or experiential observations as (deductive) reason not only because their is uncertainty of conclusions derived from induction but also because of doubts of the very principle through which those uncertain conclusions are derived.

I agree with Hume in somes sense, particularly in that plenty of people on forums try to come across as if they are making statements that are "matters of fact", but really all they are doing is providing statements based on past experience (which can but not always improve understanding) that may or may not be recurrent in the (uncertainty) of the future. At this point it is more art than science (and some people may be better than others), so despite the bleating of the loudest or most successful or wisest individuals there is ess certainty of anything than they want you to believe.

trainspotter · 10 February 2014

Foxtrot Uniform Charlie Kilo me - The future of Australian property prices is the title thread. So far it has been trending upward. The doomsayers a la Steve Keen et al have been wrong.

Buy a house .. don't buy a house ... who really gives a fats rats clacker.

burglar · 10 February 2014

trainspotter said:
Foxtrot Uniform Charlie Kilo me - The future of Australian property prices is the title thread. So far it has been trending upward. The doomsayers a la Steve Keen et al have been wrong.

Buy a house .. don't buy a house ... who really gives a fats rats clacker.

Any angler worth his salt knows how to use his worms! :

Klogg · 10 February 2014

trainspotter said:
Ermmmmmmmm NO ! Hume's Problem of Induction goes something like this:-

We naturally reason inductively: We use experience (or evidence from the senses) to ground beliefs we have about things we haven't observed.

As both Bill M and myself have observed and are using our experience to comment then Humes theory is not applicable.

Essentially, the principle of induction teaches us that we can predict the future based on what has happened in the past, which we cannot. Hume argues that in the absence of real knowledge of the nature of the connection between events, we cannot adequately justify inductive assumptions.

Spot on about the principle of induction, but my point was this - you haven't observed a significant price reduction (US style) of housing in Aus, so on your experience/observations you're assuming it won't happen.

I think it's very applicable here...

Anyway, didn't mean to derail the thread - my apologies

McLovin · 10 February 2014

Klogg said:
Spot on about the principle of induction, but my point was this - you haven't observed a significant price reduction (US style) of housing in Aus, so on your experience/observations you're assuming it won't happen.

I think it's very applicable here...

Something along the lines of stability creates instability because it encourages risk taking behaviour. Paying 30% of your wage on your mortgage repayments when interest rates are 15% is a much less risky scenario than paying 30% of your wage on mortgage repayments when interest rates are 6%.

Of course it may never come to pass, but the risk remains.

trainspotter · 10 February 2014

Klogg said:
Spot on about the principle of induction, but my point was this - you haven't observed a significant price reduction (US style) of housing in Aus, so on your experience/observations you're assuming it won't happen.

I think it's very applicable here...

Anyway, didn't mean to derail the thread - my apologies

Ermmmmmmm NO again. Can't speak for Bill M but I certainly observed what happened in the USA, even flew to Portugal and Spain to go and have a look first hand right in the middle of the GFC. Did not get to the USA until last year but I note that things are on the improve.

All of these countries were basket cases due to unregulated lending practices encouraged by their own government and or reserve bank. Over zealous investors and multi national companies trying to cash in on a quick buck. The banks would lend the money to these corporations with NIL presales and bugger all equity who would build VAST housing projects or town houses or villas or condominiums or whatever. These parasites then flogged these abodes off to the great unwashed masses with the banks greedily loaning 110% LVR as well as AMR lending practices. The excrement hits the fan and *POP* goes the housing bubble.

Does this happen in Australia? Tell me which bank would give me a couple of mill to develop a property with not much equity and no presales? Our banks are extremely profitable (27 billion between 4 banks last year) they also have one of the lowest toxic debt levels (bad payers) in the world. Unemployment is creeping up but within RBA expectations, AUD is in target range, lending practices by the banks have remained regulated and mummy and daddy are still paying the mortgages.

The issue is going to be the banks will want more profits and with the RBA advising not likely interest rate increases for quite some time I have said on several occasions that the banks will start to bracket creep their fixed rates. ANZ already has lifted .06% on it's 3 year term. My prediction would be March/April 2014 that this will begin to occur.

But hey ... what would an old coot like me with experience know eh?

Smurf1976 · 10 February 2014

McLovin said:
Paying 30% of your wage on your mortgage repayments when interest rates are 15% is a much less risky scenario than paying 30% of your wage on mortgage repayments when interest rates are 6%.

Exactly. If you buy when rates are 15% then you can reasonably assume that they are unlikely to rise much further. Give it a few years with wages growth and declining interest rates and it all becomes fairly easy.

But with rates at 6% and slow wages growth, you could well find yourself paying an increasing proportion of your income in interest payments in the years ahead. You don't have the benefits of falling rates and wage inflation working in your favour.

There's a definite risk that interest rates rise faster than wages from this point - indeed with rates so low practically any adjustment represents a significant rise in the cost of borrowed money. Eg raising official interest rates by just 1% represents an approximate 18% jump in the cost of borrowed money to consumers which is rather significant.

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