The future of Australian property prices

Value Collector said:

But yes, a lot of investors buy and hold existing real estate, but that's good, without them buying and holding there wouldn't be properties available to rent, and there would be less developments going ahead if developers were not confident that enough buyers existed to buy the finished product.

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Nah thats not true. Investors out bid the bottom half of would be owners forcing up prices with very favourable tax breaks. If they didn't do that there would be a lot more owner occupies.

Trembling Hand said:

Nah thats not true. Investors out bid the bottom half of would be owners forcing up prices with very favourable tax breaks. If they didn't do that there would be a lot more owner occupies.

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I don't think that is true, I think the amount of extra investment in new stock that investors bring both directly and indirectly would more than offset the properties that they out bid on. I would actually think that owner occupiers would tend to out bid investors.

What are these favourable tax breaks your talking about?

Value Collector said:

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

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Or more generically, housing once built produces "accommodation"/"shelter", in many different grades/levels (from basic to luxurious, from poorly to well located etc) - something of real, and relative value, required by just about everyone. And this is produced for 50-100 years.

When you buy a house, you are buying the future provision of accommodation. When you rent you are renting the accomodation for a specified period of time for a specified price. In either case the property "produces" the accommodation.

Value Collector said:

I don't think that is true, I think the amount of extra investment in new stock that investors bring both directly and indirectly would more than offset the properties that they out bid on. I would actually think that owner occupiers would tend to out bid investors.

What are these favourable tax breaks your talking about?

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Investors don't produce new stock. Infact they campaign for the opposite. If new stock were invested in, then the price would be falling, not increasing.

trainspotter said:

Ermmmmmmmmm nope.

Building approvals retain gains




http://www.abc.net.au/news/2014-02-03/home-prices-surge-again-in-january/5233942

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Building approvals are growing. Great, has nothing to do with investors who are proven to invest in existing stock.

Value Collector said:

Investors Build, renovate and develop properties. Over 90% of apartments sold off the plan go to investors.

But yes, a lot of investors buy and hold existing real estate, but that's good, without them buying and holding there wouldn't be properties available to rent, and there would be less developments going ahead if developers were not confident that enough buyers existed to buy the finished product.

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They don't build anything at the very very best they buy something someone else built. i.e existing stock.

The only ones producing value are the building companies. Investors as we talk about they do jack. They just try to make a profit by speculating on existing dwellings.

Trembling Hand said:

very favourable tax breaks

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In my case, the tax breaks over the years were insignificant when compared to the capital gains tax that I paid when I sold. They are no more favaourable that those available to any other form of business that claim their expenses and depreciate their assets.

If investing in residential real estate and claiming tax breaks for negative cash flow was so good, the super rich would own entire suburbs. There's probably a good reason why they dont.

Easy credit, a mining driven wages boom, and real estate agents drove the gains, not tax breaks.

BTW Mr Magoo, some of mine were ones I built and all were sold to owner occupiers.

Mrmagoo said:

Building approvals are growing. Great, has nothing to do with investors who are proven to invest in existing stock.

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Got a link to evidence this hard hitting statement? I have never bought established unless I could knock it down to build more units on the property. Depreciation schedule during course of construction, lower stamp duty as it is only applicable to the land value and not the building contract value, lower interest component as the money is drawn down and the bank pays the builder in installments (builder becomes the bank ... gotta love it) also product is brand new with manufacturers and builders guarantee/warranties to name a few reasons I prefer to build rather than buy established.

I think we are getting confused between a property developer and a mummy and daddy investor who buys one house for negative gearing/cash flow positive purposes ?

trainspotter said:

Got a link to evidence this hard hitting statement? I have never bought established unless I could knock it down to build more units on the property. Depreciation schedule during course of construction, lower stamp duty as it is only applicable to the land value and not the building contract value, lower interest component as the money is drawn down and the bank pays the builder in installments (builder becomes the bank ... gotta love it) also product is brand new with manufacturers and builders guarantee/warranties to name a few reasons I prefer to build rather than buy established.

I think we are getting confused between a property developer and a mummy and daddy investor who buys one house for negative gearing/cash flow positive purposes ?

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Perhaps I am not making stuff up at all and you're just talking about something different to justify your obviously flawed position.

Beej said:

When you buy a house, you are buying the future provision of accommodation. When you rent you are renting the accomodation for a specified period of time for a specified price. In either case the property "produces" the accommodation.

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Can't argue with that. A house produces accommodation just as a farm produces food, a train "produces" the movement of freight or passengers and a power station produces electricity. They're all somewhat capital-intensive in nature, with a long operating life (50 years - a few centuries for a house, 30 - 100+ years for a power station, not sure how long a train lasts but it's many years) and produce something of value once built.

At the risk of stating the obvious, there's really two issues here. One is the investment return, either capital or income, on housing and that's relatively straightforward at least in terms of crunching the numbers.

The other is a social issue relating to the cost of accommodation. People need accommodation just as they need food, passenger transport (by whatever means) and they need power. If the cost of something essential to normal living, especially something that commonly takes a substantial portion of household income, rises significantly faster than wage growth then that has a lot of social implications which are generally unpleasant for those affected.

Whilst an investor might be happy about a doubling of the price of houses, and an energy company might be happy to see the cost of power double, consumers certainly won't be happy and many will have their lives adversely impacted by such an increase. That is very different to an increase in the cost of, say, overseas travel or soap. Overseas travel is optional for the vast majority of people, if you can't afford it then you simply don't go, whilst soap is a very minor expense such that even a 10 fold increase in the price of soap wouldn't really hurt too many people to any great extent. But if something like housing, food, transport, power etc increases in cost then that's a definite problem for many people - it's a social issue as well as an economic one.

I won't say which one (for the record I'm not referring to Momentum), but there's an electricity and gas retailer that has about 50% of their entire customer base not paying bills on time and a significant number of those are on long term payment plans. That says rather a lot about the overall state of household cash flow I think - many people would seem to not have much free cash available.

Back to the topic of where prices are headed, an investor/developer bought the house next to my mums house, knocked it over and built 2 new ones. They lost around $200k. One less investor in the market now and proof that from a development perspective, the suburb is over priced. The entire suburb has been re-zoned but the numbers dont work, so nothing to spur future growth, and if growth stops, negative geared mums and dads will eventually be told by their accountant to sell their bad investment. Add to that job losses that will force some workers to quit their negative geared investments and the downward spiral takes off. Just ask someone from Ireland how fast that can happen. What we have in the market place now is the equivalent of the famous shoe shine boy.

sptrawler said:

When the house is completed, it sits there and sucks rent out of someone, it doesn't promote any more jobs growth.

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What about on-going costs for upkeep and value adding?

Paint (inside/outside)
Air-con/hot water (units and labor for someone to put it in)
Light(s)/Lighting
Timber/Wood (floor/balcony)
Gardening (soil/plants and tools/equipment)
etc...
etc...

Surely some of the things listed above is made here??? (I hope)

Mrmagoo said:

Perhaps I am not making stuff up at all and you're just talking about something different to justify your obviously flawed position.

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Got any proof to back up your statements? 40% of all mortgages in Australia are taken up by "investors" as I evidenced a few posts ago with links to the ABS etc etc. Can you prove whereby you rationalise that "investors" only buy established? My obviously flawed position has had it's interest piqued.

Property developers actually BUILD something. Surely out of this 40% of "investors" obtaining finance from said banks a portion of that must belong to them?

BTW the banks are none too friendly to lend towards said property developers. Currently looking at 25% of on completion valuation of land component alone. 14 blocks @ 120k each x 25% = 420k loan. Not quite enough to develop as costs alone are more than this prior to even adding in overheads, contingencies and profit. Therefore the property developer has to chuck in a fair bit of his own money for some skin in the game to make it realistic and or viable.

The problem for Ireland was that government finances had become too dependent on property taxes – both capital gains taxes and stamp duties. In 1997, Ireland’s government cut the capital gains tax rate from 40% to 20% and extended property tax concessions, which helped fuel property speculation. In a nutshell, Ireland’s planning system was ineffective in mitigating price rises through easy credit and speculation, (banks were lending 100% LVR's) since the new housing was predominantly built too late in the process and only where they were permitted, rather than where the market demand was. The end result is a large number of empty estates of unwanted housing in remote locations far from amenities or employment, huge developer and bank losses.

SO the banks were lending 100% of valuation to punters whilst the big greedy property developers smashed out poor quality homes in areas where no one wanted to buy and funded by German banks who were lending at 3%. Gee that sounds familiar ... Portugal, Spain anyone?

As soon as Australia shows any sign of inflation the old handbrake of interest rate rises from the RBA rears it's ugly head ...... yet again. Not that hard to understand really? March 2011 was our bottom and November 2016 will be the downhill run. All aboard

Will property prices fall ? You betcha ..... in CERTAIN areas. Mortgage stress I think they call it.

beachlife said:

They are no more favaourable that those available to any other form of business that claim their expenses and depreciate their assets.

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Not against PAYG earnings they don't. Any Tax breaks should be isolated to the assets or group of assets. That would be more likely to ensure investment decisions made on the asset rather than a government backed winner.

Value Collector said:

That's where we will have to disagree, you see no benefit in providing shelter, I see a great benefit in homes that provide shelter, and the average Aussie home provides more than just shelter, Compare what the average family in Tokyo live in to what the average Aussie family live in, the Aussie family home will have a much larger land content, more living and entertaining spaces you have to compare apples with apples.

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You're definitely NOT comparing apples with apples. Japan has a population of 127 million people in a tad under 378M square KM. Land scarcity in Japan is a far bigger issue than Australia, though with years of negative population growth it's becoming less of an issue as time goes by. The greater Tokyo metropolitan area has more people than the east coast of Australia!

We should be able to have affordable housing, but we don't. Why is our housing so expensive? It's not totally due to having some of the largest houses in the world, because you can buy similar housing stock in much ofthe USA for significantly cheaper prices. Why is NG available on already constructed housing? It doesn't increase the available housing stock, and over 90% of "investors" are buying established housing.

Huge mortgages to buy shelter is not good for the community and leaves the economy far more vulnerable to shocks. Huge mortgages lead to higher rents, also not good for society or the economy. It's a property Quango designed around restrictive zoning laws that encourage land banking by developers. Texas has a population greater than Australia - 25.6M, faster pop growth than Australia - something like 360K+ a year, higher income growth than Australia, and the only thing we beat them in is house price growth. Dallas has a median price of just $244K (pop 1.22M), Houston $188K (2.14M), Forthworth $166K (pop 760K), San Antonio $196K (pop 1.3M). All decent sized cities with very affordable housing compared to pretty much any Australian city.

We have 1.44M Aussies out of work, another 1.105M are underemployed. Those stats do not seem supportive of continued above CPI growth for housing, let alone rental growth to feed the NG market, especially as unemployment is creeping up and underemployment will be increasing even faster.

The below graph is scary, especially considering mortgage interest rates are the lowest in decades. It's a sad reflection on Australian society that it's now considered smart for a first home buyer to buy an investment property rather than their own home as the entry into the property market.

Trembling Hand said:

Not against PAYG earnings they don't. Any Tax breaks should be isolated to the assets or group of assets. That would be more likely to ensure investment decisions made on the asset rather than a government backed winner.

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Quarantining any losses to add to the capital base so you pay less CGT on sale would help to ensure a more economic focus on investing in housing rather than seeing it as a giant tax lurk with the hope of making a capital gain greater than your losses.

I've yet to have an economically rational reason for why above CPI and above income growth house inflation is good for society or the economy.

sydboy007 said:

I've yet to have an economically rational reason for why above CPI and above income growth house inflation is good for society or the economy.

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There is nothing more compliant, than workers, scared to death and in debt to the eye balls.

Mrmagoo said:

Investors don't produce new stock. Infact they campaign for the opposite. If new stock were invested in, then the price would be falling, not increasing.

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Who is the largest buyers the apartments off the plan which allows developments to happen,... Investors

Who buys a vacant horse paddock and carves it up into a new estate,... Investors

who Buys an old house on a quarter arce block and builds a duplex on it,... Investors

I myself bought any investment property and built a decent flat out the back, creating new stock and a good cash flow stream in the process.

Mrmagoo said:

Building approvals are growing. Great, has nothing to do with investors who are proven to invest in existing stock.

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That's just simply untrue, investors invest across the board, new old, off the plan everything.

Even if it were true that investors only ever buy new stock, the fact that they are buying it allows developers to go and build more.

Mrmagoo said:

They don't build anything at the very very best they buy something someone else built. i.e existing stock.

The only ones producing value are the building companies. Investors as we talk about they do jack. They just try to make a profit by speculating on existing dwellings.

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So how many houses can a builder build if he has no one buying them or nobody paying him to build?