The future of Australian property prices

[trainspotter]

So before the rise the median was 539466-17700 = 521766.

So the quarterly growth was 17700/521766x100 = 3.4%

Do you really think that property will keep growing at this rate? At these rates values will double in around 6 years. I cant see that happening.

There is absolutely no way that this is sustainable. I have already put my head on the block and said that November 2016 will be the peak of this cycle. Things will start to slow in March / April 2014 (I have explained my reasons on many occasions already as to why I believe this) and things will remain at a plateau through 2015 until stagflation takes over in early 2016 with a downturn in late 2016. That's my take on events.

If it keeps up at this rate what do you think will happen? RBA will yank the one and only lever they know how to try and slow it down. Mortgage stress kicks in and then the houses begin to come back on the market at a lower price than what was originally paid (like a broken record this) and so the cycle of property is fulfilled.

 

[sptrawler]

There is absolutely no way that this is sustainable. I have already put my head on the block and said that November 2016 will be the peak of this cycle. Things will start to slow in March / April 2014 (I have explained my reasons on many occasions already as to why I believe this) and things will remain at a plateau through 2015 until stagflation takes over in early 2016 with a downturn in late 2016. That's my take on events.

If it keeps up at this rate what do you think will happen? RBA will yank the one and only lever they know how to try and slow it down. Mortgage stress kicks in and then the houses begin to come back on the market at a lower price than what was originally paid (like a broken record this) and so the cycle of property is fulfilled.

Oh great trainspotter, just when I think it's time to jump in, you pull the rug out from under me.
Now I'll have to wait for the next cycle.

 

[trainspotter]

Oh great trainspotter, just when I think it's time to jump in, you pull the rug out from under me.
Now I'll have to wait for the next cycle.

March 2011 was the time to jump in. Cut and run prior to November 2016

 

[sydboy007]

3, for it to be a new NG investment there must have been a capital gain, and that would have offset prior losses,

That's a big assumption. It's quite possible that the seller has sold at a real inflation adjusted loss, or even a straight out nominal loss.

4, find me somebody who bought an investment property in 2000, made the annual rental increases and is not currently positively geared

I'll repeat once again, that the IP market has made aggregate losses EVERY YEAR since 2000. A market that makes losses for 13 years in a row is not functioning rationally. Buying an asset that has a real income yield barely positive after inflation and tax is not a good investment. Chasing capital gains as the sole way to get ahead seems to be a poor investment, especially since the income growth for most properties is quite low. There was no growth in the median rent for Sydney last year. Melbourne had spectacular growth of $10 a week.

National median rental growth for house was 0.9% or after tax and inflation a loss of roughly 3%. Units actually fell 0.4% nationally so the loss was even worse.

Pretty much every share I own has provided me with above inflation income growth over the last year, baring my hybrid investments that followed the BBSW down.

 

[beachlife]

If it keeps up at this rate what do you think will happen? RBA will yank the one and only lever they know how to try and slow it down. Mortgage stress kicks in and then the houses begin to come back on the market at a lower price than what was originally paid (like a broken record this) and so the cycle of property is fulfilled.

I doubt that, I think they will be more concerned about the exchange rate this time, but if this pans out as some predict it wont matter what they do.

http://www.marketwatch.com/story/sc...ins-traction-2014-02-11?link=MW_story_popular

 

[trainspotter]

I doubt that, I think they will be more concerned about the exchange rate this time, but if this pans out as some predict it wont matter what they do.

http://www.marketwatch.com/story/sc...ins-traction-2014-02-11?link=MW_story_popular

Bwhahahahah *gasp* hahahahaahhaaaaaaa The RBA will not let rampant inflation caused by housing to bring the curtain down. They will move rates up in an effort to wound it a bit .... THEN the banks will be shifting their rates at a MUCH greater rate then what the RBA has chosen. Profit gouging anyone? Coming to a bank near you real soon !

As for the correlation of the '29 crash to what is happening now I am pretty sure that this was done for entertainment purposes only. It just so happens to "fit" the '29 data. Nothing surprising here but we will see soon enough. May I think is the prediction isn't it?

 

[beachlife]

Bwhahahahah *gasp* hahahahaahhaaaaaaa The RBA will not let rampant inflation caused by housing to bring the curtain down. They will move rates up in an effort to wound it a bit .... THEN the banks will be shifting their rates at a MUCH greater rate then what the RBA has chosen. Profit gouging anyone? Coming to a bank near you real soon !

As for the correlation of the '29 crash to what is happening now I am pretty sure that this was done for entertainment purposes only. It just so happens to "fit" the '29 data. Nothing surprising here but we will see soon enough. May I think is the prediction isn't it?

If the RBA decides to kill the housing market and at the same time kill whats left of the export market then heaven help us all.

 

[Smurf1976]

So far as the "is it a business" argument is concerned, I agree with the notion that investing in property is indeed a business provided that the property is either available for rent or the business involves some form of active trading or development of either new or existing properties.

A business normally involves producing something of value. Renting out houses is the business of providing rental accommodation. Property development is the business of developing land or buildings which are then rented or sold. A gas pipeline is in the business of transporting gas from a source to consumers. Etc.

What I do not see as a real business is the practice of buying vacant land then sitting on it for a very long period. Nothing of value is being produced. There is no income and no regular capital gain is realised. Little or no activity takes place. That's not a business in my opinion, it's a passive investment just like buying shares in BHP and holding them for 20 years is a passive investment and does not constitute a share trading business.

 

[trainspotter]

If the RBA decides to kill the housing market and at the same time kill whats left of the export market then heaven help us all.

Not kill it ... slow it down a little.

 

[Value Collector]

1, That's a big assumption. It's quite possible that the seller has sold at a real inflation adjusted loss, or even a straight out nominal loss.



2, I'll repeat once again, that the IP market has made aggregate losses EVERY YEAR since 2000. A market that makes losses for 13 years in a row is not functioning rationally. Buying an asset that has a real income yield barely positive after inflation and tax is not a good investment. Chasing capital gains as the sole way to get ahead seems to be a poor investment, especially since the income growth for most properties is quite low. There was no growth in the median rent for Sydney last year. Melbourne had spectacular growth of $10 a week.

National median rental growth for house was 0.9% or after tax and inflation a loss of roughly 3%. Units actually fell 0.4% nationally so the loss was even worse.

Pretty much every share I own has provided me with above inflation income growth over the last year, baring my hybrid investments that followed the BBSW down.

1, if you hold a property for 10years the rental yield would have grown to the point that it is no longer negatively geared, the price should have also grown so you should book a capital gain and pay capital gains tax. The only way for you not to pay capital gains tax is to sell it at the same or lower price than you paid for it. If you held it for ten years and then sold at the same price you bought, the new buyer would not be negatively geared.

2, ok, the property market doesn't lose money every year for thirteen years, your adding 1 and 1 and getting 3. The only thing that causes people to be negatively geared is using to much debt, its the debt that causes the loss not the underlying asset. If you buy a property outright with cash you are not going to be neg geared, you will have your money earning a 4% inflation hedged return! where your capital and income should increase over time with inflation + maybe 1% growth due to population growth! its not as good as a growth stock! but it is certainly better than cash in the bank long term.

When you add to much debt you become neg geared, over time though inflation will push up rents and you should reduce your principle so you will become positively geared after a few years. I am not suggesting its good to be neg geared, cash flow is good, but if you just starting out you may have to be neg for a while.

As i said above a good share portfolio should out perform a property portfolio on an un leveraged basis, hence why i keep roughly 2/3 of my capital in shares, but that other third I have in property adds to the stability of my portfolio and makes my over all position more solid, i think shares and property are a great team

 

[Value Collector]

What I do not see as a real business is the practice of buying vacant land then sitting on it for a very long period. Nothing of value is being produced. There is no income and no regular capital gain is realised. Little or no activity takes place. That's not a business in my opinion, it's a passive investment just like buying shares in BHP and holding them for 20 years is a passive investment and does not constitute a share trading business.

I agree that sitting on land is not a business, its a bit like sitting on gold, its just owning an asset, owning shares in bhp however is much more business like, because by buying the shares you immediately become a business owner.

 

[beachlife]

What I do not see as a real business is the practice of buying vacant land then sitting on it for a very long period. Nothing of value is being produced. There is no income and no regular capital gain is realised. Little or no activity takes place. That's not a business in my opinion, it's a passive investment just like buying shares in BHP and holding them for 20 years is a passive investment and does not constitute a share trading business.

+1

The ATO agrees. You can only claim yearly deductions against an income producing venture, which is why share traders and share investors are treated differently, and people that sit on land are treated differently to people that provide rental properties.

Owning shares does not make the holder a business owner, or anything resembling one because they have no say in the day to day running of that business.

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Not kill it ... slow it down a little.

View attachment 56816

Without school halls and pink batts this time it might be really slow.

 

[Value Collector]

Owning shares does not make the holder a business owner, or anything resembling one because they have no say in the day to day running of that business.

.

I think you are confusing business owners with business managers, shareholders are definitely part owners of the underlying businesses in the companies they own shares in. Shareholders own the businesses, management is employed by the shareholders to run the businesses.

If you don't think the bhp shareholders own bhp's businesses assets, who does?

 

[sydboy007]

What I do not see as a real business is the practice of buying vacant land then sitting on it for a very long period. Nothing of value is being produced. There is no income and no regular capital gain is realised. Little or no activity takes place. That's not a business in my opinion, it's a passive investment just like buying shares in BHP and holding them for 20 years is a passive investment and does not constitute a share trading business.

A land tax would help to overcome this issue. Considering the large developers have something like 18 years of supply that they dole out in drips and drabs so as to maintain high prices.

A land tax would also help to provide the income stream that local Govt needs to build infrastructure. Certainly a fairer way than forcing new construction to wear 50K+ developer levies.

ACT is moving down this path, but it's going to take 20 years to get there and I don't think we have near that long to restructure things.

 

[sydboy007]

1, if you hold a property for 10years the rental yield would have grown to the point that it is no longer negatively geared, the price should have also grown so you should book a capital gain and pay capital gains tax. The only way for you not to pay capital gains tax is to sell it at the same or lower price than you paid for it. If you held it for ten years and then sold at the same price you bought, the new buyer would not be negatively geared.

Once again a big assumption. Not every property makes a profit after purchase cost, holding costs, sale costs. An article I read a couple of months back put the average break even period somewhere around 7 years, and that was during a period of high property inflation.

2, ok, the property market doesn't lose money every year for thirteen years, your adding 1 and 1 and getting 3. The only thing that causes people to be negatively geared is using to much debt, its the debt that causes the loss not the underlying asset. If you buy a property outright with cash you are not going to be neg geared, you will have your money earning a 4% inflation hedged return! where your capital and income should increase over time with inflation + maybe 1% growth due to population growth! its not as good as a growth stock! but it is certainly better than cash in the bank long term.

If the below doesn't show the property making consistent income loses, then what does it show? How can you separate asset prices and debt. The below household debt to GDP ration seems to show a very strong correlation between increasing debt and house prices. NZ is showing what happens when you limit LVR to 80% - house price growth has slowed considerably. the US shows what happens when long term interest rates rose in the second half of last year - housing finance slowed dramatically.

There's been longish periods where rental increases have been stagnant to negative, especially after inflation.

When you add to much debt you become neg geared, over time though inflation will push up rents and you should reduce your principle so you will become positively geared after a few years. I am not suggesting its good to be neg geared, cash flow is good, but if you just starting out you may have to be neg for a while.

If nearly 50% of IP loans are I/O how does the principal get reduced? I/O loans also increase the level of gearing available for the investor, since you nearly double the cashflow available for the loan eg a $450K loan with 5.2% at P/I has repayments of $2683/m. Same loan I/O is $1950/m. Keeping things I/I means you could increase the loan size from $450K to $620K. What proportion of I/I loans have been used to do this?

Why do people add too much debt? It seems to be a pervasive issue with investment properties in Australia. Could it be the tax system? Say a combination of NG and halving CGT?

 

[Mrmagoo]

The reason is that they are baby boomers who have different expectations and higher levels of wealth due to the time in which they were working/wealth building.

Many are so rich. They just don't care. Compared to Gen Y the boomers might as well be cashed up Chinese investors because the wealth difference is on a comparable scale.

 

[Value Collector]

A land tax would also help to provide the income stream that local Govt needs to build infrastructure. Certainly a fairer way than forcing new construction to wear 50K+ developer levies.

.

So you want the guys that own a horse paddock, pineapple farm or just an acreage block to pay extra each year to fund the infrastructure for the new developments rather than the people who will actually use that infrastructure???

seems unfair to me.

 

[McLovin]

So besides scale, what's the underlying differences in their operations as opposed to a guy that operates a portfolio of say 4 investment properties.

It's all about scale. It's the reason the ATO considers buying an IP (or a few) or buying a couple of thousand of BHP shares to be investing, not carrying on a business.

 

[Value Collector]

Not every property makes a profit after purchase cost, holding costs, sale costs

Neither does every share purchase. But the point I am making is that you can't have it both ways, you can't claim that a property will be forever negatively geared, without producing a taxable capital gain. Because Inflation will in general push up the rental yield to the point where it is no longer neg geared. The only way the next owner could neg gear it is if he paid a higher price, which would create a taxable capital gain. If he didn't pay a higher price he would be positive geared.

If the below doesn't show the property making consistent income loses, then what does it show? How can you separate asset prices and debt

.

Because you are trying to say property in general loses money, when it doesn't. To weigh up whether an asset class is a viable investment you need to look at how it would perform debt free, a debt free property is a perfectly sound investment. It is then up to individuals whether they want to add debt based on their own judgement of the risks and rewards.

Its like me saying the aussie share market has lost money for 13 years, because based on a 100% loan at 8% the annual dividends don't cover the interest charges. the fact is that statement is false because a) the dividends have increased almost every year and even if you took a 100% loan it would be positive now, b) the fact that I'm judging whether it is profitable based on debt is the wrong way to look at it.

The below household debt to GDP ration seems to show a very strong correlation between increasing debt and house prices.

If you put up a price chart of crude oil, Iron ore, gold, Big macs, 600ml cokes, salmon and a whole host of other items you would see the same correlation.

There's been longish periods where rental increases have been stagnant to negative, especially after inflation.

you keep mentioning "after" inflation, as if the a neg geared properties income needs to outpace inflation to become positively geared, when inflation actually increases the rental yield while the repayments to the bank stay the same. Also Inflation is one of the reasons property investment is preferred to cash, as inflation decreases the value of cash, your property investment will maintain its value and the income will increase with inflation, so you position is maintained.

If nearly 50% of IP loans are I/O how does the principal get reduced?

even if it wasn't reduced, given time the property would still become pos geared, But I know I have reduced the amount of my I/O loans you can make lump sum payments into it whenever you want, you can also hold money in an offset account rather than pay it off directly, a lot of people prefer to do this. most people will wait till their non deductable debt is cleared though.

I/O loans also increase the level of gearing available for the investor, since you nearly double the cashflow available for the loan eg a $450K loan with 5.2% at P/I has repayments of $2683/m. Same loan I/O is $1950/m. Keeping things I/I means you could increase the loan size from $450K to $620K. What proportion of I/I loans have been used to do this?

no doubt they have been, but so what? Don't you think interest only loans are used in all sorts of businesses, the vast majority of business loans are interest only, the idea

Why do people add too much debt? It seems to be a pervasive issue with investment properties in Australia. Could it be the tax system? Say a combination of NG and halving CGT?

All sorts of reasons, feeling that they don't want to miss out, wanting to invest but being undercapitalized, wanting to be look good at BBQ, having confidence in there ability to earn a high income to clear it.

The combination of NG and CGT is available on shares also.

 

[Value Collector]

It's all about scale. It's the reason the ATO considers buying an IP (or a few) or buying a couple of thousand of BHP shares to be investing, not carrying on a business.

Ok that's probably the difference in our thinking here, I wasn't using the strict tax definition of "Carrying on a business"

I was thinking of a more general usage of the word business ie, business - the activity of making, buying, or selling goods or providing services in exchange for money.

An IP certainly does fit the general definition.