The future of Australian property prices

[banco]

Yeh it was against mine in the 80s

Interest 18%

For 6 months on your $50,000 house.

 

[Mrmagoo]

For 6 months on your $50,000 house.

Less than 50k... you gotta remember, working classes houses existed too ! Only t hey were purchased by working class people. For reference my parents bought their 2nd home in the early 90s for $60,000. Outer suburban family home...

 

[pixel]

Yeh it was against mine in the 80s

Interest 18%

Honestly, I didn't see it as "against me" at all. Rather an opportunity.

At the time of 18% mortgage rates, I happened to be changing jobs, which included a move from a small town into the City. The old place I had to leave, we had bought for under $20k, spent mostly elbow grease and the wife's designer talents to do up, and sold it for 100%+ profit. But instead of buying a big house in the new City, loading ourselves with a $50k mortgage at 18%, we rented for a few years and invested our cash at close to 18%. OK, the Crash of October 87 helped: The week after, I bought RIO (or CRA as it was then) for $5.85; also loaded up on some promising IPOs, e.g. WAN for $1. All the while paying about 4% "interest" in rent.

Was I part of the maligned "Establishment"? Definitely not! We simply did our sums, made the most of the situation, and bought the next house mortgage-free with the money saved, plus profits made when an opportunity presented itself.

 

[Value Collector]

It would be ****ing awesome, people who work for a living would be rewarded, those who borrow would be punished. Excellent system. 18% interest rates for the win !

These days you are either credit leveraged.

Or part of the corrupt union/government/credit consortium to demand unsustainable high wages. i.e why minor pay rises for people in actual industries are a big deal and the union construction companies are on something like 60 dollars an hour plus a list of entitlement 4 pages long, all paid for on the international credit card.

Where would the workers be working??? The Australian dollar would go so high local businesses would be shutting down left right and centre, the mining industry would be killed,

The only people being rewarded would be those who stock pile cash, no other investment would be viable, why risk starting a business and employing people when you can earn 18%, no investment no jobs.

 

[prawn_86]

Was I part of the maligned "Establishment"? Definitely not! We simply did our sums, made the most of the situation, and bought the next house mortgage-free with the money saved, plus profits made when an opportunity presented itself.

While I like the strategy and love the story due to the fact that the house to income multiple has increased dramatically this is now much harder to achieve. Even if the average household could save 20k per year after tax(which I think is unlikely) its still going to take them 15 or so years to save enough to buy the average house at todays prices

 

[tech/a]

For 6 months on your $50,000 house.

Was $70 k and wage was $450 a week
Not the 5.5 % now and an average wage of $1200 a week.

Whingers!

Every generation has crosses the bare.
You can take what seems to be the easy road or knuckle down
And slug out the harder road.
It's not until your my age you see lost/wasted opportunity.

 

[Julia]

Honestly, I didn't see it as "against me" at all. Rather an opportunity.

At the time of 18% mortgage rates, I happened to be changing jobs, which included a move from a small town into the City. The old place I had to leave, we had bought for under $20k, spent mostly elbow grease and the wife's designer talents to do up, and sold it for 100%+ profit. But instead of buying a big house in the new City, loading ourselves with a $50k mortgage at 18%, we rented for a few years and invested our cash at close to 18%. OK, the Crash of October 87 helped: The week after, I bought RIO (or CRA as it was then) for $5.85; also loaded up on some promising IPOs, e.g. WAN for $1. All the while paying about 4% "interest" in rent.

Was I part of the maligned "Establishment"? Definitely not! We simply did our sums, made the most of the situation, and bought the next house mortgage-free with the money saved, plus profits made when an opportunity presented itself.

Hallelujah!! Exactly. The actual interest rate wasn't really relevant when considered in the whole context.
I was paying 22% (in NZ on second mortgage on IPs) but the capital gain and high rents more than compensated. As pixel says 100% in a fairly short time was very possible. Many more people could have done it but saw the high interest rate as an insurmountable hurdle and walked away without completing the whole projected calculation.

While I like the strategy and love the story due to the fact that the house to income multiple has increased dramatically this is now much harder to achieve. Even if the average household could save 20k per year after tax(which I think is unlikely) its still going to take them 15 or so years to save enough to buy the average house at todays prices

Agree, prawn. It was a fairly rare opportunity back in the 80's and to make the most of it required willingness to borrow quite heavily. I'd be surprised if we - at least here in Australia - ever see inflation at that level again.

There are nevertheless smaller pockets of opportunity every now and again, viz during the credit squeeze of a few years ago 8% on term deposit.

 

[Value Collector]

its still going to take them 15 or so years to save enough to buy the average house at todays prices

why would they want to save up the full purchase price, you only need to save a deposit.

I mean if you don't buy a house your going to have to pay rent anyway, so you only have to save enough deposit to get into the house and then you can use your normal rental payments + the $20,000 / year savings to pay it off.

 

[sydboy007]

why would they want to save up the full purchase price, you only need to save a deposit.

I mean if you don't buy a house your going to have to pay rent anyway, so you only have to save enough deposit to get into the house and then you can use your normal rental payments + the $20,000 / year savings to pay it off.

But rental yields are lower than mortgage rates, and net rental yields are even worse. As a home owner you're looking at paying out at least $3K a year for council / water / insurance / strata. Repairs then need to be added on top of that.

If land inflation continues then the gearing inherent with buying a property can give a decent return on your money, but we went nearly a decade through the noughties in Sydney with no real property price growth. Long time to wait for a profit, especially if you're negative gearing and loosing thousands every year.

With real wages growth negative, the ToT continuing to fall, I don't see income growth being strong for at least the next few years. Unless foreigners continue to bid up the market I don't see how it's possible for house price growth to maintain the above income growth trajectory.

 

[Smurf1976]

Was $70 k and wage was $450 a week
Not the 5.5 % now and an average wage of $1200 a week.

Therein lies the problem. That house is probably worth $350 - 400K now at a rough guess, so 5 - 6 times what you paid for it. But wages are less than 3 times the amount they were back then. In real terms, house prices have increased greatly.

It works provided that interest rates stay around the present level for the next 20+ years, or if any rise in interest rates is matched by wages growth.

That won't likely happen of course, we'll see all sorts of unexpected things happen over the next two decades, and there's the problem. But if something is already at an extreme, and that is certainly the case with today's low interest rates, then it's a brave move to literally bet the house that there won't be a trend reversal this side of 2030.

I'm not some whinger who missed out on the boom, I own my residence (outright) and have no debts of any kind whatsoever. But the current high debt / low IR model poses a major risk to the broader economy if the tide turns and interest rates start to rise. We'll see a degree of chaos if (when?) that happens.

Gut feeling says that it may well work out OK and that we'll "muddle through" but there's a risk that we won't manage to do that.

 

[Value Collector]

But rental yields are lower than mortgage rates, and net rental yields are even worse. As a home owner you're looking at paying out at least $3K a year for council / water / insurance / strata. Repairs then need to be added on top of that.

If land inflation continues then the gearing inherent with buying a property can give a decent return on your money, but we went nearly a decade through the noughties in Sydney with no real property price growth. Long time to wait for a profit, especially if you're negative gearing and loosing thousands every year.

With real wages growth negative, the ToT continuing to fall, I don't see income growth being strong for at least the next few years. Unless foreigners continue to bid up the market I don't see how it's possible for house price growth to maintain the above income growth trajectory.

If you have a decent deposit, the interest on the loan would be about the same or less than your rental payment, your $20k/ year savings can be used to clear principle and pay costs.

But that is just year one, no doubt rents will continue to increase with inflation, however your interest payments will be getting less every year as you pay down the loan. Your incomes will probably go up with inflation also, so the payments take up less and less of your earnings.

Eventually you'll own your home, and generation next will say you had it easy and the world has changed since 2015,

 

[Value Collector]

but we went nearly a decade through the noughties in Sydney with no real property price growth. Long time to wait for a profit, especially if you're negative gearing and loosing thousands every year.

With real wages growth negative, the ToT continuing to fall, I don't see income growth being strong for at least the next few years. Unless foreigners continue to bid up the market I don't see how it's possible for house price growth to maintain the above income growth trajectory.

You keep mentioning real price growth and real wages growth

Do you understand that your loan is not affected by inflation, so even if your income or asset price only increases by inflation, then that is a net benefit to you because your repayment won't increase with inflation.

Also, while your talking about "real" things, why not think about "real" interest rates eg, if your paying 5% on your loan and the inflation rate is only 3%, then the real cost of that loan is 2%, because while you actually pay 5% the capital value of the house will increase with inflation and offset a chunk of that interest! and not to mention the rent you are offsetting is affected by inflation also.

So all that time your saying sydney had no "real" wages or price growth, the only people that were not benefiting was the renters, because they had no inflation hedge, all wages growth was offset by increases in expenses, the home owners also had the wage increases, but didn't suffer the increased expenses to the same extent, and they had a chunk of their capital which was in a real asset providing a natural inflation hedge.

 

[pixel]

While I like the strategy and love the story due to the fact that the house to income multiple has increased dramatically this is now much harder to achieve. Even if the average household could save 20k per year after tax(which I think is unlikely) its still going to take them 15 or so years to save enough to buy the average house at todays prices

True, Dendrobranchiata - but only to an extent
The first home we bought was in a small town; it had 2 bedrooms and cost the equivalent of one year's gross income. No, my salary wasn't that exorbitant, but we didn't buy our first home in the "average" market bracket, but picked one that we knew we could afford.
Not in a posh suburb.
No home theatre.
One poky bathroom.
...
We paid cash, and only accepted the company's 90% mortgage because the subsidised interest was lower than what we got in a term deposit. We didn't miss the Big City Life and found it quite amusing that the company volunteered an "incentive" to get us to move and settle 200k's away from Perth.

And then we got to work on renovations and extensions. First an entertainment area in the backyard, so we could have friends over for bush dances and barbecues. Some of them even helped putting a carport together, and turning the double garage into half workshop, half games room.

I'm sure there could be similar houses still on the market, at affordable prices, if first home buyers were prepared to compromise and invest their spare time into more productive endeavours than following each other on facebook and tweeting twaddle to other twits.
But maybe that only shows my age and fossil status

 

[Mrmagoo]

I'm sure there could be similar houses still on the market, at affordable prices, if first home buyers were prepared to compromise and invest their spare time into more productive endeavours than following each other on facebook and tweeting twaddle to other twits.
But maybe that only shows my age and fossil status

This is not correct. You are sure there are houses in the exact same situation as in 1980 but things have changed, that is, the reason we are calling it unaffordable is not because you can make minor compromises and pay it off with one years salary. If that were the case, houses would be affordable.

 

[Julia]

If you have a decent deposit, the interest on the loan would be about the same or less than your rental payment, your $20k/ year savings can be used to clear principle and pay costs.

But that is just year one, no doubt rents will continue to increase with inflation, however your interest payments will be getting less every year as you pay down the loan. Your incomes will probably go up with inflation also, so the payments take up less and less of your earnings.

Eventually you'll own your home, and generation next will say you had it easy and the world has changed since 2015,

You keep mentioning real price growth and real wages growth

Do you understand that your loan is not affected by inflation, so even if your income or asset price only increases by inflation, then that is a net benefit to you because your repayment won't increase with inflation.

Also, while your talking about "real" things, why not think about "real" interest rates eg, if your paying 5% on your loan and the inflation rate is only 3%, then the real cost of that loan is 2%, because while you actually pay 5% the capital value of the house will increase with inflation and offset a chunk of that interest! and not to mention the rent you are offsetting is affected by inflation also.

So all that time your saying sydney had no "real" wages or price growth, the only people that were not benefiting was the renters, because they had no inflation hedge, all wages growth was offset by increases in expenses, the home owners also had the wage increases, but didn't suffer the increased expenses to the same extent, and they had a chunk of their capital which was in a real asset providing a natural inflation hedge.

+1 to both above posts.

 

[Mrmagoo]

The rich get richer, the poor get poorer. That saving now just means you can one day borrow against a 5% deposit and the interest will be similar to rent (completely forgetting all other expenses of owning) is an indication of how sick our society has become.

 

[Smurf1976]

You keep mentioning real price growth and real wages growth

Do you understand that your loan is not affected by inflation, so even if your income or asset price only increases by inflation, then that is a net benefit to you because your repayment won't increase with inflation.

Bingo!

10% inflation and 13% interest on a small debt beats 2% inflation and 5% interest easily for that reason. The higher inflation rapidly erodes the real value of the debt - after a few years it becomes a truly trivial % of income even if you're paying 15%+ interest on it.

But if you've got low inflation, then you basically end up having to repay that debt as such without its' real value being inflated away.

1980's - lower debt relative to wages but with a high interest rate such that loan repayments were a similar % of income to today. But after just a few years those repayments ended up being trivial as a % of a rapidly growing income. Nobody regularly gets 10% pay rises these days in the same or similar job, nor do they have the benefit of a trend of declining interest rates.

If someone bought at 17% interest rates and paid 50% of their income in mortgage repayments then within a few years that was under 25% of income and falling. A lot of people ended up making trivial repayments as a % of income within a decade, leaving the mortgage open only to avoid various bank fees etc. Nobody's likely to do that today, unless we see the RBA cut the cash rate to zero and there's a wages boom - possible but I doubt it.

If someone bought a property on 1 January 1990 then as a % of income their interest repayments would have dropped by about 52% just 4 years later. Eg keeping it simple and using 50% of income in 1990, it was down to just 24% of income in 1994 and 16% by the year 2000. In contrast, if they'd bought in 2003 then they were still paying 38% of their income in interest a decade later. A very different situation there. Note that I've used RBA inflation data as proxy for same job wages here, and mortgage interest rates from here http://www.loansense.com.au/historical-rates.html

The trend of interest rates after you buy, not the actual rate itself, determines the outcome. Easy if rates fall after you buy, the mortgage ends up as just another household bill and nothing to really worry about. But you're completely stuffed if you buy at 5% with a mortgage as a high % of the purchase price and then rates go up significantly. Whilst it hasn't happened yet, there's a very real risk that interest rates could rise from present levels well before wages catch up - even a 1% rise in IR's, a minor move by historical standards, will seriously stretch many borrowers today. Better hope we don't see multiple rises in the same day.....

Housing is somewhat unique as an expense for most consumers, but the only one where prices increasing is often seen as a good thing. Nobody's likely to cheer too much if food or petrol prices double as a % of income. Witness all the fuss about electricity costs in recent times - but it's still a minor expense compared to a high mortgage at low interest rates.

 

[sydboy007]

You keep mentioning real price growth and real wages growth

Do you understand that your loan is not affected by inflation, so even if your income or asset price only increases by inflation, then that is a net benefit to you because your repayment won't increase with inflation.

Also, while your talking about "real" things, why not think about "real" interest rates eg, if your paying 5% on your loan and the inflation rate is only 3%, then the real cost of that loan is 2%, because while you actually pay 5% the capital value of the house will increase with inflation and offset a chunk of that interest! and not to mention the rent you are offsetting is affected by inflation also.

So all that time your saying sydney had no "real" wages or price growth, the only people that were not benefiting was the renters, because they had no inflation hedge, all wages growth was offset by increases in expenses, the home owners also had the wage increases, but didn't suffer the increased expenses to the same extent, and they had a chunk of their capital which was in a real asset providing a natural inflation hedge.

I mention real income growth because that's what will allow someone to pay more for the house than you did. I don't see how we can double the price to income ratio for the next generation like has occured in the last 25ish years. Households are already at a 155%+ debt to income level on average. I don't see that sustainable long term. The next economic shock will cause a major shake out of the market. In that case I'd prefer to be a renter able to cut their costs easier than someone with a mortgage.

You seem to be ignoring interest rates changing. Pre GFC mortgage rates were a real 5.5% or more. Rents were definitely not increasing at a rate to make that cost shock easier to deal with. Real net rental yields in some parts of Sydney are close to 0 with a lot < 1%. In my area a 3 BR house goes for around $850 a week and would be worth from $900K. A 600K loan would set you back 3800 a month at 5%, bumping to 4388 at 6.5%. A renter is up for $44.2K, the owner for $45.6K to $52.65K depending on interest rates, with another 3-4K in holding costs. Borrow more and the cost differential starts to get larger very quickly

A renter investing the difference between renting and a mortgage into income producing assets would have access to inflation hedging. They'd also be in a far more secure situation as selling shares / bonds is easier than a house. Holding costs are pretty close to zero too. depending on income level some salary sacrificing might also be a good option, once a decent buffer has been built up.

 

[Value Collector]

The rich get richer, the poor get poorer. That saving now just means you can one day borrow against a 5% deposit and the interest will be similar to rent (completely forgetting all other expenses of owning) is an indication of how sick our society has become.

Interest will be equal to rent in first year, then decrease exponentially as the loan reduces, rent will increase exponentially with inflation.

The expenses of owning are lower than the rent you pay, and interest as i pointed out is temporary, it reduces every year till its gone.

 

[Value Collector]

Some of you talk like property owner have to pay interest charges forever, the interest decreases over time.

And if your worried about rate rises, you can take a 5 year fixed rate, after five years your principle would have reduced and wages probably increased, so even if rates went up it's effect would not be so much because the principle would be lower, and wages increased.

You also don't have to go large from the start you can start in a smaller home or apartment.