The future of Australian property prices

Smurf1976 said:

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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Maybe you are forgetting that interest rates were not always at 15% ... they ROSE to 17%. Prior to that they were around the 9% mark for quite some time. It is one thing to cherry pick the data it is another to completely ignore facts.

Why would interest rates bother you at the moment when you can get a 10 year FIXED loan under 7%?

http://www.rams.com.au/home-loans/fixed-rate-home-loan/ or 6.77% to be precise !

Affordability? Things were a LOT worse back in the 80's my friend.

I think you are forgetting about having to actually repay the loan here. There's more to it than just interest payments. If you have fairly rapid wages growth then the real value of the debt diminishes pretty quickly.

Going all the way back to 1983 (simply because it's 30 years ago - there isn't any useful data available for 2014 yet). For ease of calculation I've assumed a 100% loan and I've used the interest rate applying during June of each year. House price and wage data is for Melbourne (since it's a common place to live and the data is available).

Average house price = $52,500
Average wage = $20,493
Interest rate = 12.5%
Interest on a 100% loan thus takes 32% of gross income.

But by 1984, just one year later, wages had increased to $22,220 and interest rates had fallen to 11.5%. It now took only 27% of gross income to pay the interest on the loan even if none of the principal had been repaid.

1985 - wage $23,587 and interest at 12.0%. It takes 26.7% of gross income to pay the interest.
1986 - wage $25,407, interest 15.5%. It takes 32% of gross income to pay the interest.
1987 - wage $26,910, interest 15.5%. It takes 30.2% of income to pay the interest.
1988 - wage $29,063, interest 13.5%. It takes 24.4% of income to pay the interest.
1989 - wage $30,987, interest 17.0%. It takes 28.8% of income to pay the interest.
1990 - wage $31,200, interest 16.5%. It takes 27.8% of income to pay the interest.
1991 - wage $34,018, interest 13.0%. It takes 20.0% of income to pay the interest.
1992 - wage $34,575, interest 10.5%. It takes 15.9% of income to pay the interest.
1993 - wage $35,360, interest 9.5%. It takes 14.1% of income to pay the interest.

So over ten years, a combination of rising wages (up 72.5%) and a drop in interest rates from 12.5 to 9.5% results in the cost of interest on the original loan, if none of the principal has been repaid, declining from 32% to 14.1% of gross income.

Now consider someone who bought ten years ago in 2003.

Average house price = $361,300
Average wage = $51,298
Interest rate = 6.55%
It takes 46.1% of gross income to pay the interest.

2004 - wage $53,139, interest 7.05%. It takes 47.9% of gross income to pay the interest.
2005 - wage $53,534, interest 7.30%. It takes 49.3% of gross income to pay the interest.
2006 - wage $57,496, interest 7.30%. It takes 45.9% of gross income to pay the interest.
2007 - wage $60,434, interest 8.05%. It takes 48.1% of gross income to pay the interest.
2008 - wage $63,154, interest 9.0%. It takes 51.5% of income to pay the interest.
2009 - wage $66,040, interest 5.65%. It takes 30.9% of income to pay the interest.
2010 - wage $67,166, interest 6.65%. It takes 35.8% of income to pay the interest.
2011 - wage $66,872, interest 7.79%. It takes 42.1% of income to pay the interest.
2012 - wage $67,700, interest 6.99%. It takes 37.3% of income to pay the interest.
2013 - wage $69,460, interest 6.15%. It takes 32% of income to pay the interest.

It seems pretty clear to me that an average person, buying an average house in Melbourne in 2003, has seen a much greater portion of their income disappear in interest payments compared to someone who bought an average house in 1983.

Someone who bought in 1983 paid an average of 25.35% of their income toward interest over the next decade, varying between 14.1% and 32% over those years. And after 10 years, it would take 1.48 years of average income to pay out the principal on the loan.

Someone who bought 20 years later in 2003 paid an average of 42.45% of their income toward interest over the next decade, varying between 30.9% and 51.5% over those years. And after 10 years, it would take 5.2 years of average earnings to pay out the principal.

Someone who bought 30 years ago got a massively better deal than someone who bought 10 years ago. Whilst I don't doubt for a minute that the high interest rates circa 1989 caused massive pain at the time, they were relatively short lived compared to the situation today. And unless you actually bought in 1988 or 89, not even those high interest rates resulted in an interest to income ratio as bad as that experienced by the more recent home buyer.

Someone who bought in, say, 1986 was a lot better off at 17% interest in 1989 (46.5% of income spent on interest) than someone who bought in 2003 was with 9% interest in 2008 (51.5% of income spent on interest). And the 1980's home buyer has a much smaller loan, relative to income, to actually repay too.

There is, of course, far more to it than just interest but again it's the same pattern. Paying off a $52,500 house when your income a decade later has risen to $35,360 is a lot easier than paying off a $361,300 house when your income is just under $70K a decade after you bought the house. You do the maths - unless you were unlucky enough to buy in 1988 or 89, the situation was a lot better back then than it is today and that comes down to lower house prices relative to wages combined with fairly strong wages growth. Neither of those are present today.

Most of the data I've quoted here came from the following:

http://simplesustainable.com/topic/2463-melbournes-median-house-prices-vs-wages-1965-2010/

http://www.loansense.com.au/historical-rates.html

Smurf1976 said:

I think you are forgetting about having to actually repay the loan here. There's more to it than just interest payments. If you have fairly rapid wages growth then the real value of the debt diminishes pretty quickly

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In depth response Smurf1976 and very detailed. You have just realised what I have been bleating on about. You only take out IO loans only if you are investing in RE. The principal is not a tax deduction ... it is capital input The interest is on the other hand allowable as an ATO receipt to reduce your outgpings. Is this the system I advocate for ? Absolutely it is.

There is nothing wrong with making a profit. Believe me you have to pay capital gains tax on the damn velocity of money through the system. It balances out in the long run I can assure you.

Now back to 'affordability' ... If the picture you have painted is based on previous history then for the love of God why do we even bother? Let's all get off this merry go round and cause chaos. People have got to live somewhere right? This is the system that is in place .... the same one from 30 years ago. Now to be very specific when I say this ... you do not have to buy a PPOR as your first home. Being one sided and not seeing opportunities in RE is to only look at one side of the equation. To only look at affordability you are mainly looking at the FHOB Brigade. They do not own the entire market in Australia ... and diminishing fast. Does this mean that a small percentile of the populace wont be able to buy a home. Damn straight it does. Same thing in the 80's as well.

Borrowing capacity is looking pretty swish for the next ten years at 6.77 per cent. Stability in the market ? I would think so.

Great post Smurf1976 - except a few things outside the parameters will affect the overall outcome.

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.

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

You are relying on the home owner to be "static" as well as "average". There are several reasons as to why the median house price has increased so dramatically and the two most obvious ones is that construction costs have double over this period of time and the other is the willingness of punters to pay more for inner city or ocean side property thusly driving up the "median" prices. It's all a bit skewiff to only look at one piece of the equation.

As an "average" housing loan runs for a period of 11 years before the home owner either refinances or sells the property it is unlikely the figures you represent have any meaningful analysis other than to point out that the FHB Brigade is going to have to look at owning property further out and more affordable for them. I do not know of too many people who simply buy one house and live in it for the rest of their lives and pay off the mortgage. Property is a commodity to be bought and sold as RE cycles it's way through yet again another phase.

Anyways Smurf1976 great post and as usual the detail is fantastic. Your maths is spot on but not taking into account several variables as I have pointed out above. If you sold the property in 2003 and used the profit to purchase another property or two and starting renting a few out then the maths gets really interesting !

Meanwhile back at the ranch the 8 capital cities continue to rise:-

AUSTRALIAN capital city residential property prices rose 3.4 per cent in the December quarter, official data showed. That followed a rise of 2.4 per cent in the September quarter.
In the year to December, the residential property price index rose 9.3 per cent, the Australian Bureau of Statistics said on Tuesday.
Economists had expected a rise of three per cent for the December quarter.

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http://www.news.com.au/finance/busi...-rise-in-dec-qtr/story-e6frfkur-1226823473136

FINANCE continued to flow freely into the housing market right up to the end of 2013, keeping prices on a rising trend.
And investors grabbed a near record slice of the cash.
The value of loans approved for housing in December was $27.05 billion, according to seasonally adjusted figures from the Australian Bureau of Statistics (ABS).
Despite a small fall of one per cent in December, that total was still $5.75 billion, or 27 per cent higher, than December 2012.
Of that total, $10.77 billion is marked for investors, a rise of 41 per cent for the year.
That was the fastest annual rise in financing for housing investors for a decade, and brought their slice of the pie to 40 per cent, also a decade high.
Excluding refinancing transactions for established home-owners, investors are now getting 48 cents of every dollar lent for housing.
Meanwhile, those identifying themselves as first home buyers were awarded just nine per cent of non-refinancing loans.
That is not quite as low as the 8.8 per cent recorded in September 2013, or the 8.2 per cent low of January 2004, when investors ruled the roost.
But it's still unusually low - not much more than half the 20 year average of 15.2 per cent.
It's clearly investors who are driving a strong rise in prices.
Confirming the trend showing up in more timely figures from RP Data and Australian Properly Monitors, the ABS on Tuesday released figures showing residential property prices in the December quarter were up by 9.3 per cent from a year earlier.
The Sydney market posted the biggest gain, 13.8 per cent, while at the other end of the scale prices in Canberra were down by 0.3 per cent.
The strong demand for housing, encouraged by the ultra-low interest rates set by the Reserve Bank of Australia, is spilling over into new housing - one of the RBA's key aims.
Loans approved for new housing, including investor loans identified as such, totalled $3.33 billion in December, after rising for each of the past six months, to be up by $660 million, or 25 per cent, from 12 months earlier.

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http://www.news.com.au/finance/busi...nding-are-strong/story-e6frfkur-1226823632554

And investors ruled the landscape at 40% leaving the FHB Brigade to pick up 9%. Hang on a minute ... that means the remaining 51% are purchasing a PPOR !!!! Looks like the RBA policy is working of the transition from mining to housing.

trainspotter said:

Now back to 'affordability' ... If the picture you have painted is based on previous history then for the love of God why do we even bother? Let's all get off this merry go round and cause chaos. People have got to live somewhere right? This is the system that is in place .... the same one from 30 years ago. Now to be very specific when I say this ... you do not have to buy a PPOR as your first home. Being one sided and not seeing opportunities in RE is to only look at one side of the equation. To only look at affordability you are mainly looking at the FHOB Brigade. They do not own the entire market in Australia ... and diminishing fast. Does this mean that a small percentile of the populace wont be able to buy a home. Damn straight it does. Same thing in the 80's as well.

Borrowing capacity is looking pretty swish for the next ten years at 6.77 per cent. Stability in the market ? I would think so.

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Why is shelter, a basic need, seen as an asset?

It's this that has caused the most harm at the individual level, and across the entire economy because it has made pretty much everything we do noncompetitive with pretty much every other country in the world since our rents have to be so high.

Why can't we emulate Texas and have high wage growth, high population growth, stable real shelter pricing??

For a country with so much land, it's disgusting that we've got ourselves into this situation.

Housing just hit $5T according to the ABS. $5T of pretty unproductive "investment" that's drawn in hundreds of billions of dollars in foreign debt for no benefit.

sydboy007 said:

1, Why is shelter, a basic need, seen as an asset?


2, For a country with so much land, it's disgusting that we've got ourselves into this situation.

3, Housing just hit $5T according to the ABS. $5T of pretty unproductive "investment" that's drawn in hundreds of billions of dollars in foreign debt for no benefit.

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1, Why wouldn't it be an asset? an asset is defined as a "a useful or valuable thing or person" Food is a basic need, are you saying we shouldn't consider farmland an asset, Water is a basic need, are you saying we shouldn't consider dams, desalination plants and water pipes assets.

2, Australia does have a lot of land, and the vast majority is very cheap, it's also desert. There is very cheap land and housing available, unfortunately if you are limiting your preferred location to where thousands of others also want to live you will have to out bid them, the fact that we have vast tracts of land that nobody wants will not lower the value of Sydney property.

3, No benefit to housing???? you just described it as a basic need. which one is it, it is a basic need or does it have no benefit.

So how high can housing prices go in the capital cities?

I find it very hard to see how people will be able to finance the $500k plus prices of most houses in Melbourne. Of course this figure is certainly on the low side side. The last time I looked at median house prices for most suburbs there were only a few under $500k.

I'm particularly concerned with what will happen when the car industry closes in the next 2-3 years. I can only see massive direct and indirect job losses and closures of scores of factories that were part of the network of component suppliers. How will the tens of thousand of people affected manage to keep up payments ?

http://www.reiv.com.au/en/Property-Research/Median-Prices/House-price-maps

http://www.reiv.com.au/Property-Research/Median-Prices/Market-History

basilio said:

1, So how high can housing prices go in the capital cities?

2, I find it very hard to see how people will be able to finance the $500k plus prices of most houses in Melbourne. Of course this figure is certainly on the low side side. The last time I looked at median house prices for most suburbs there were only a few under $500k.

I'm particularly concerned with what will happen when the car industry closes in the next 2-3 years. I can only see massive direct and indirect job losses and closures of scores of factories that were part of the network of component suppliers. How will the tens of thousand of people affected manage to keep up payments ?

http://www.reiv.com.au/en/Property-Research/Median-Prices/House-price-maps

http://www.reiv.com.au/Property-Research/Median-Prices/Market-History

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1, Basically as high as the market can support, If the market can't support the price, the price will come back.

But your question is how high can "Housing prices" go. That depends on what you define housing to be. If you consider "housing" to be 3 bedroom homes on 1/4acre blocks, then If the population continues to grow in the capital cities, and houses have to be demolished to make way for apartments, the cost of those houses will rise as the developers out bid people who want to occupy the houses. Houses in the suburbs where there is no development will then rise as the demand for the remaining house block rises. But the price of "housing" if you consider it to be any dwelling such as apartments etc, should be somewhat stable inline with average wages. But where as in the 1970's the average housing unit might have been a 3bed house, now it might be an apartment or townhouse, and if you try to go for a house you will find it more difficult.

2, As I pointed out above, as a population grows, land will become more expensive and the people in the lower income brackets will have to live in higher density styles of housing,

I think it is funny that boomers use retiring at 40 as an example of how hard they had it.

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sydboy007 said:

Why is shelter, a basic need, seen as an asset?

It's this that has caused the most harm at the individual level, and across the entire economy because it has made pretty much everything we do noncompetitive with pretty much every other country in the world since our rents have to be so high.

Why can't we emulate Texas and have high wage growth, high population growth, stable real shelter pricing??

For a country with so much land, it's disgusting that we've got ourselves into this situation.

Housing just hit $5T according to the ABS. $5T of pretty unproductive "investment" that's drawn in hundreds of billions of dollars in foreign debt for no benefit.

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Not only that, they make renting non-viable through facist treatment of tenants.

Then the system of inequality throug fiat money means that there is always someone willing to pay the price.

The rest of the economy as we're already seeing, fails.

Value Collector said:

1, Basically as high as the market can support, If the market can't support the price, the price will come back.

But your question is how high can "Housing prices" go. That depends on what you define housing to be. If you consider "housing" to be 3 bedroom homes on 1/4acre blocks, then If the population continues to grow in the capital cities, and houses have to be demolished to make way for apartments, the cost of those houses will rise as the developers out bid people who want to occupy the houses. Houses in the suburbs where there is no development will then rise as the demand for the remaining house block rises. But the price of "housing" if you consider it to be any dwelling such as apartments etc, should be somewhat stable inline with average wages. But where as in the 1970's the average housing unit might have been a 3bed house, now it might be an apartment or townhouse, and if you try to go for a house you will find it more difficult.

2, As I pointed out above, as a population grows, land will become more expensive and the people in the lower income brackets will have to live in higher density styles of housing,

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The whole housing situation has really entered uncharted water, it will be interesting to see if it can be supported.
As has been said already the FHB are pretty well frozen out, the baby boomers are entering retirement age so their activity should reduce.
That leaves cashed up overseas buyers, who don't need loans.

Value Collector said:

Australia does have a lot of land, and the vast majority is very cheap, it's also desert. There is very cheap land and housing available, unfortunately if you are limiting your preferred location to where thousands of others also want to live you will have to out bid them, the fact that we have vast tracts of land that nobody wants will not lower the value of Sydney property.

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Agreed in the case if the inner to middle parts of Sydney, Melbourne etc.

But how does one explain paying big $ for a house in Tasmania or a regional area in another state that is surrounded by undeveloped land within walking distance of the town center? The inherent value of that land is pretty close to zero, the only real value being in the house itself plus services (power, water etc) connected and the road that goes to it. The land itself isn't inherently valuable if it's surrounded by plenty more land that isn't being used and which isn't likely to be used for the foreseeable future.

But then we have various council laws and developers buying up land which they sit on, both of which create an artificial shortage of land.

Smurf1976 said:

Agreed in the case if the inner to middle parts of Sydney, Melbourne etc.

But how does one explain paying big $ for a house in Tasmania or a regional area in another state that is surrounded by undeveloped land within walking distance of the town center? The inherent value of that land is pretty close to zero, the only real value being in the house itself plus services (power, water etc) connected and the road that goes to it. The land itself isn't inherently valuable if it's surrounded by plenty more land that isn't being used and which isn't likely to be used for the foreseeable future.

But then we have various council laws and developers buying up land which they sit on, both of which create an artificial shortage of land.

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or 450k for a house in the outer burbs which used to be the middle of nowhere.

Smurf1976 said:

But how does one explain paying big $ for a house in Tasmania or a regional area in another state that is surrounded by undeveloped land within walking distance of the town center?

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I am not familiar with Tasmania, But It would be supply and demand.

Just because there is seemingly empty land doesn't mean it will reduce the price of established residential house and land. there are other factors such as zoning, land owners not wanting to sell, no willing developers etc etc.

But if the price of established estates is high, and the available land zoning allows it, and the land owner is willing to sell, then a developer will buy the land, put in roads and sell the blocks for a profit putting downward pressure on prices.

Mrmagoo said:

or 450k for a house in the outer burbs which used to be the middle of nowhere.

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"Used to", that's the key to the answer.

Sydney CBD "used to" be in the middle of no where. But now it's not. The population has grown exponentially in the last 200 years.

It's all supply and demand.

Value Collector said:

"Used to", that's the key to the answer.

Sydney CBD "used to" be in the middle of no where. But now it's not. The population has grown exponentially in the last 200 years.

It's all supply and demand.

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Just an off the cuff question, but what do you feel is a reasonable amount to borrow?

I know it is relative to the value of the property, but I'm just wondering what is a 'reasonable ammount' to borrow, I think I'm out of touch.

Smurf1976 said:

Agreed in the case if the inner to middle parts of Sydney, Melbourne etc.

But how does one explain paying big $ for a house in Tasmania or a regional area in another state that is surrounded by undeveloped land within walking distance of the town center? The inherent value of that land is pretty close to zero, the only real value being in the house itself plus services (power, water etc) connected and the road that goes to it. The land itself isn't inherently valuable if it's surrounded by plenty more land that isn't being used and which isn't likely to be used for the foreseeable future.

But then we have various council laws and developers buying up land which they sit on, both of which create an artificial shortage of land.

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Smurph, I can only talk for my street, suburb about 10k's out of Perth.
The prices have gone from $600k to $800k, in the last two years, they are knock over houses on duplex blocks.
It isn't Aussies buying them.

This headline shows how stupid it is.

http://www.theage.com.au/business/property/australian-homes-worth-5tn-20140211-32eyq.html

House values have gone up $184billion in three months, what a joke.

trainspotter said:

And investors ruled the landscape at 40% leaving the FHB Brigade to pick up 9%. Hang on a minute ... that means the remaining 51% are purchasing a PPOR !!!! Looks like the RBA policy is working of the transition from mining to housing.

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EEK mining investment that returns a dividend on investment, to housing that produces nothing after it's built.

Best of luck with that theory.
All it does is stimulate jobs for a short term, saturation point kicks in.

Then what?

The only 'true' statement I've heard is these things take a long time to unfold.

sptrawler said:

Just an off the cuff question, but what do you feel is a reasonable amount to borrow?

I know it is relative to the value of the property, but I'm just wondering what is a 'reasonable ammount' to borrow, I think I'm out of touch.

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Well thats going to come back to your personal situation, but generally the less you borrow the better, and if you have to borrow have a plan to clear that debt asap. But the most important thing is to not over commit yourself.

sptrawler said:

EEK mining investment that returns a dividend on investment, to housing that produces nothing after it's built.

.

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What do you mean housing returns nothing after its built, it generates a weekly rental return.