The future of Australian property prices

Mrmagoo said:

Due to corruption in our nation trains either don't go to an airport or have huge charges attached.

Click to expand...

$14 each way in Sydney and the train drops you right under the international terminal, domestic involves some walking.

prawn_86 said:

Surprised no-one has commented on this:

http://www.abc.net.au/news/2014-07-14/renting-or-buying-an-even-money-call-says-reserve-bank/5595814

Granted there are limitations to the study, but as I have said for the past 5 years, there is limited tangible upside to buying in the current environment (Generally speaking)

Personally, if I had bought a house straight out of uni, I probably wouldn't of been able to afford, or feel comfortable moving overseas with a mortgage over my head

Click to expand...

I've believed since the early noughties that renting is better than buying. I can't imagine what the stress is like knowign you have a monster mortgage of 600K+ to feed for the next 25-30 years. Seems naive of me to think a 270K mortgage back in 97 was huge.

I say while rents are lower than interest rates accept the subsidy that landlords and other tax payers are providing and rent, just save via salary sacrificing or some other form of investing / savings.

I had a look at houses for sale in my area recently. Not that I'm seriously considering moving, it was just for curiosity.

In short, even if I paid the full asking price with no attempt to negotiate, I could buy a better house than mine for about the same price I actually paid (which was a bit below the asking price) in 2007.

So prices have fallen a few % in nominal terms in my area over the past 7 years. It's not a huge fall, only a few %, but they certainly haven't gone up.

Location is suburban Hobart, 8km by road from the CBD.

Smurf1976 said:

I had a look at houses for sale in my area recently. Not that I'm seriously considering moving, it was just for curiosity.

In short, even if I paid the full asking price with no attempt to negotiate, I could buy a better house than mine for about the same price I actually paid (which was a bit below the asking price) in 2007.

So prices have fallen a few % in nominal terms in my area over the past 7 years. It's not a huge fall, only a few %, but they certainly haven't gone up.

Location is suburban Hobart, 8km by road from the CBD.

Click to expand...

That's like an 18% fall if you take inflation of 2.5% a year into account. 3BR apartments in my area are now going for 1.1-1.35M off the plan, though a 4BR townhouse (3 floors) is going from 875K at auction, or a bargain priced 3BR apartment for $729K with 6K in strata fees a year, though the 2 smaller bedrooms don't enable cat swinging by the looks of the floor plan.

Cheap land should be a major competitie advantage for Australia, but somehow we've turned it into a mill stone around our necks.

prawn_86 said:

Surprised no-one has commented on this:

Click to expand...

The study has the following items which I find 'interesting'.

It is based on a matched sample of rental properties and rent levels. In other words, the study is restricted to rentals. These are not indicative of the wider stock of housing, but may be relevant to housing purchased under leverage by investors taking out investor mortgages.

They elected to eschew measures like Price-Rent and Price-Income for statistical reasons. Because these relationships have not shown reversion in Australia they are not useful....What? Precisely.

The approach is to take an econometric model on levels. Those econometricians out there know what I'm on about. The idea is to infer a 'cost' of ownership which includes things like interest rates, cost of owners' equity, depreciation, ... , expected future appreciation. If this cost matches rents, the prices are taken to be fair value.

The composite cost of interest rates and imputed opportunity cost for owners is ... wait for it ... taken to be the real yield inferred from mortgage rates. These mortgage rates are observed from the 10yr fixed figure and offset by a maturity adjustment of 1.3%. Inflation is taken from the swap curve.

A very important figure is expected future returns. These are hedonically adjusted and, therefore, do not represent the nominal price movements you might see. They have chosen a figure equal to the average return over the period since 1955. Hence, it is backward looking and assumes that this type of thing is mean reverting. If we have been in a secular housing boom, as well we might, it just assumes this keeps going and justifies current housing prices. The structure of household incomes and interest rate levels have moved in favour of housing in a secular manner. How much further can this go? Interest rates are at record lows and.. gosh.. should each set of house occupants get a second wife/husband to help pay for the mortgage? Hopefully that illustrates the bullishness in this figure.

Overall, these guys are smart and know about housing as they have prior publications on the matter. However, I am skeptical about some of the reasons why simple and illustrative measures like P-Rent and P-Income are omitted on the basis of econometric rationale rather than just common sense. They are routinely used in other locations because their numeric properties satisfy certain things...and, somehow, things are different in Australia. These measures would show Australia to be in an elevated level of pricing. In its place, a structurally valid model has been estimated. Some of the assumptions are, to my mind, hard to support with confidence or seem outright bullish by design. Finally, the sample related to rental properties only. Whilst delightful to a statistician, no effort was made to relate these findings to the total capital stock.

I remained inclined to think that residential property has a modest outlook.

Smurf1976 said:

In short, even if I paid the full asking price with no attempt to negotiate, I could buy a better house than mine for about the same price I actually paid (which was a bit below the asking price) in 2007.

Click to expand...

My first home was purchased at what has turned out to be the local peak in November 2012. There was excess demand due to large scale industrial development so property developers went gangbusters to increase supply. Now there is a glut of dwellings and at a guess I think if I tried to sell now I would take a 50k to 80k loss including mortgage interest already paid. Obviously, being my PPOR, I am not selling in the next 20 years at least.

DeepState said:

The study has the following items which I find 'interesting'
....

I remained inclined to think that residential property has a modest outlook.

Click to expand...

Yeh it is far from a perfect study but still interesting nonetheless imo

A nation of loss making landlords

sydboy007 said:

A nation of loss making landlords

Click to expand...

It would be nice to know what impact depreciation has had on those losses, i.e. non-cash losses, and to what extent people are 'losing'.

It's quite possible to be cash flow positive and have a tax loss.

Vixs said:

It would be nice to know what impact depreciation has had on those losses, i.e. non-cash losses, and to what extent people are 'losing'.

It's quite possible to be cash flow positive and have a tax loss.

Click to expand...

True, but my marginal tax rate is likely to be higher whatever the tax loss is made up from.

The below graphs shows that investors are not the freind of FHBS / renters.

am I doing something wrong, I am not losing money on my IP???

sydboy007 said:

The below graphs shows that investors are not the freind of FHBS / renters.

Click to expand...

Interesting to see that the current level is at an extreme so far as that graph shows. Interesting.....

Smurf1976 said:

Interesting to see that the current level is at an extreme so far as that graph shows. Interesting.....

Click to expand...

I wish the graph would go back a few more decades. It would most likely look even more extreme. Definitely not a rational market.

qldfrog said:

am I doing something wrong, I am not losing money on my IP???

Click to expand...

Not saying this is you, but most landlords are so clueless, that they wouldn't even know if they are making a loss.

MW

sydboy007 said:

Definitely not a rational market.

Click to expand...

It's rational to the extent that investors believe that capital appreciation adjusted for improvements will outweigh the net rent loss such that the total return meets whatever they might call a cost of capital. As to whether that's all rational or not...I'll leave it to you.

medicowallet said:

Not saying this is you, but most landlords are so clueless, that they wouldn't even know if they are making a loss.

MW

Click to expand...

hum from last year: had a bit of work to do on flooring but managed 8k profit for a current value of 300k (paid 275k 3 years ago)-> so a still pathetic 2.7% return (aka inflation and that is it)
depreciation will add 1.5k as the cherry on the miserable cake.
So not that great return yet fully rented, nice location, etc
If I had to have a loan-> would be a loss/negative gearing;
I could max the loan there, make a loss, give 5% to the bank, have negative gearing, but not sure i would beat the 5% return (after tax) on any other investment I would take with that freed money so just keep the morgage to 0 and have a nice buffer ready to be used on the next market correction;

qldfrog said:

hum from last year: had a bit of work to do on flooring but managed 8k profit for a current value of 300k (paid 275k 3 years ago)-> so a still pathetic 2.7% return (aka inflation and that is it)
depreciation will add 1.5k as the cherry on the miserable cake.
So not that great return yet fully rented, nice location, etc
If I had to have a loan-> would be a loss/negative gearing;
I could max the loan there, make a loss, give 5% to the bank, have negative gearing, but not sure i would beat the 5% return (after tax) on any other investment I would take with that freed money so just keep the morgage to 0 and have a nice buffer ready to be used on the next market correction;

Click to expand...

As long as people take into account wear and tear / replacement / renovation costs, inflation then it is fine.

Sure as you alerted to, opportunity cost is there, but that is just asset selection bs. There is always an argument to be made retrospectively, but imo as long as I outperform inflation, I will never be hypercritical of opportunities I lost out to, otherwise you will believe you fail every year.

I have a similar buffer position at the moment it seems. I just don't have any decent non-business area where I am comfortable (ie shares or residential property) as I believe both are on shaky ground.

MW

I just don't have any decent non-business area where I am comfortable (ie shares or residential property) as I believe both are on shaky ground.

Click to expand...

Can't you treat shares the same way as your other business interests?

I mean if you use your business skills to identify good share investments, you should feel comfortable in both areas.

medicowallet said:

Not saying this is you, but most landlords are so clueless, that they wouldn't even know if they are making a loss.

MW

Click to expand...

Same with a lot of share investors, all they look at are share prices, they will panic sell if the share price falls even if their company is making good profits and expanding its business, or they will hold a stock thats going up even if its profits are not growing and the business doesn't justify the price.

DeepState said:

It's rational to the extent that investors believe that capital appreciation adjusted for improvements will outweigh the net rent loss such that the total return meets whatever they might call a cost of capital. As to whether that's all rational or not...I'll leave it to you.

Click to expand...

Yeah, I just don't know how much longer the capital growth party go on for when fewer and fewer locals can afford to buy, and renting is becoming the same.