The future of Australian property prices

[FxTrader]

As for increasing income, not that easy the last few years. Since the GFC I've had 2 pay rises of roughly 2% each. People in the retail sector would likely find getting extra income even more daunting. There isn't the work like there was pre GFC when people were equity mating their life styles. In the IT industry, contract work is being increasingly the way employers want to higher staff. That lack of job security makes it difficult for someone to commit to a house as well.

It is difficult to foresee the emerging job opportunities that will sustain the housing price boom in capital cities going forward. The IT industry, once a source of many high paying jobs, has been gutted by offshoring and rampant abuse of the 457 visa system. Given my recent experiences with tradesmen (electricians, plumbers etc.) and the rates they charge, they seem to be doing well for the moment but wage growth in most industries is poor indeed.

With the outrageous prices of property now I don't know why anyone would want to put themselves through the stress of a 4 or 5 times household income mortgage, especially when unemployment is on the rise.

Probably the fear of being consigned to renting for the rest of their lives. Getting on the property ladder is getting more difficult. When I attend opens I see mostly investors, upgraders and downsizers these days, the lack of young couples is quite noticeable. Younger buyers tend to concentrate on the fringe suburbs for obvious reasons.

 

[sptrawler]

At some point in the last 20 years, and I think it was in 2000, property went from being for shelter to being an asset. It's now siphoning just about all credit growth in the economy, with business credit actually falling. This attitude has caused a massive cost inflation for everything. All rents are higher than they should be, causing the cost of most goods and services to be higher. Wages have to be higher to support al the increased costs. It's a pernicious cycle in the economy.

The number of property investors who have no idea of the yield that their property is making pretty much shows just how screwed up the housing market has become.

Agree with you completely, but it is what it is, people who don't have a house have to have a plan.

Constantly complaining won't bring the prices down, a recession will, but who's to say the person who wants a house still has a job when the oportunity presents.

Investors need to be given a shock, to get them out of the market and stop this myth that houses can't go down, perpetuating.
However as you said, it looks as though too many politicians have their nose in the NG trough.

The other problem is the RBA trying to nurse Australia through this transition period. They have interest rates at a level that encourages property speculation, to provide employment in the building industry.

Maybe they should give us another recession we have to have, like the good old days.

 

[Value Collector]

It is difficult to foresee the emerging job opportunities that will sustain the housing price boom in capital cities going forward. .

You don't need boom prices for property to make sense, all you need is an understanding that for the next 40 years you will need to live somewhere and standard 3% inflation.

 

[ROE]

The number of property investors who have no idea of the yield that their property is making pretty much shows just how screwed up the housing market has become.

That is a big assumption, banks usually get them to spell out the income from the properties and various other financial factors for them to approve the loan.

don't worry there are always people who tell you not to buy because it is too expensive on the way up
and not to buy because it will go lower on the way down

only action and some sacrificed is what works, the rest are all cheap talk

I am not pro-properties but I been around long enough to know what works

 

[FxTrader]

You don't need boom prices for property to make sense, all you need is an understanding that for the next 40 years you will need to live somewhere and standard 3% inflation.

Agree, but not for the reason you suggest. Renting cheaply and buying IP makes more sense if you view property as an investment grade asset class. The government provides you with generous tax incentives to invest in property for other people to rent, not for property to live in yourself. A PPOR is best deferred until one's investment property portfolio provides the wealth to buy a home either outright or with a low mortgage. The equity can easily be used to leverage into more IP if you wish.

 

[Mrmagoo]

Agree with you completely, but it is what it is, people who don't have a house have to have a plan.

Maybe they should give us another recession we have to have, like the good old days.

What you don't understand is we're buying for shelter. I will buy a house if/when I am married and the wife has kids. Otherwise I don't need to own a house. Compulsory savings is one point, but the numbers don't stack up at all right now. If it is just me all I really need is a one bedroom unit and they represent terrible value. Just because I am not at the point in my life where I need to own does not mean I should be punished with another 300k debt. Life and the economy shouldn't be about buying as much property as soon as you can.

The problem with share housing is the type of person you will attract to sharing in a low demographic area is not good. Again, people will say "oh you're just being a snob and a precious gen y" because they're never experienced it. Low demographic areas are 100% fine for sharing a home with your family. You'll get kids that can't pay rent or keep the place clean. Older guys who are drug addicts or gambling addicts and women who have mental problems.

The % of people who are just grown adults earning a modest income looking for a place to live is small and identifying them from the above is nearly impossible no one goes to an interview and says "Yup I'm a drug addict who will destroy your rented home and get you in trouble with the agent or damage the place you just bought and not pay rent".

Sharing a house you own is going to be a case of paying 350-450 a week to effectively be in a share house, to have 1 bedroom in a 3 bedroom house in the middle of nowhere. It is not a cheaper solution.

All because investors have pushed up prices to ridiculous levels.

 

[Mrmagoo]

Agree, but not for the reason you suggest. Renting cheaply and buying IP makes more sense if you view property as an investment grade asset class. The government provides you with generous tax incentives to invest in property for other people to rent, not for property to live in yourself. A PPOR is best deferred until one's investment property portfolio provides the wealth to buy a home either outright or with a low mortgage. The equity can easily be used to leveraged into more IP if you wish.

What if you view it as a home ? You're forgotten among a sea of investors wanting free money.

 

[Mrmagoo]

You don't need boom prices for property to make sense, all you need is an understanding that for the next 40 years you will need to live somewhere and standard 3% inflation.

No one is disputing that owning a house is superior to renting in everyday. What they are disputing is the prices that are being asked for that privilege are not reflective of the value of a home but reflective of the free money investors want to steal from FHBers.

If I could find a decent unit at a reasonably affordable price I'd buy one tomorrow. The fact is they don't exist and any purchase would financially cripple me.

Investors flip houses to each other, the hot potato is intended to land with a FHB.

 

[Value Collector]

No one is disputing that owning a house is superior to renting in everyday. What they are disputing is the prices that are being asked for that privilege are not reflective of the value of a home but reflective of the free money investors want to steal from FHBers.

If I could find a decent unit at a reasonably affordable price I'd buy one tomorrow. The fact is they don't exist and any purchase would financially cripple me.

.

even at todays prices, it still works out cheaper to own than to rent, if you worked out how much you would have to pay in rent over 25 years, I bet it is a lot more than the cost of ownership over that time, and that's before you add in the inflation hedging.

 

[Julia]

At least the figures give some benchmark to what people are saying is possible, or to be honest, just how difficult it really is.

As for increasing income, not that easy the last few years. Since the GFC I've had 2 pay rises of roughly 2% each. People in the retail sector would likely find getting extra income even more daunting.

Does extra work have to be in your same full time industry? Something entirely different? I know people who, to achieve a goal, worked several nights in a factory, or even an abbattoir. Neither would be great, I agree, but it all depends how much you want what you want.
Maybe some very personalised IT service marketed via letterbox drop?

There isn't the work like there was pre GFC when people were equity mating their life styles. In the IT industry, contract work is being increasingly the way employers want to higher staff. That lack of job security makes it difficult for someone to commit to a house as well. Retail and Service sector staff have also faced below CPI wage increases, so their costs of living are taking an increasing share of their income which leaves less to save.

Yep, all true and all just more reasons to think on a different level about additional alternatives.

At some point in the last 20 years, and I think it was in 2000, property went from being for shelter to being an asset. It's now siphoning just about all credit growth in the economy, with business credit actually falling. This attitude has caused a massive cost inflation for everything. All rents are higher than they should be, causing the cost of most goods and services to be higher. Wages have to be higher to support al the increased costs. It's a pernicious cycle in the economy.

Again, you're (understandably) talking about big cities. Regional property prices are still low, virtually no recovery from GFC fall. As more people are able to work remotely that might be some assistance.

The other problem is the RBA trying to nurse Australia through this transition period. They have interest rates at a level that encourages property speculation, to provide employment in the building industry.

Agree. And two guesses as to what will happen to many of those who have bought on the basis of current rates when inevitably rates rise again.

What you don't understand is we're buying for shelter. I will buy a house if/when I am married and the wife has kids. Otherwise I don't need to own a house. Compulsory savings is one point, but the numbers don't stack up at all right now. If it is just me all I really need is a one bedroom unit and they represent terrible value. Just because I am not at the point in my life where I need to own does not mean I should be punished with another 300k debt. Life and the economy shouldn't be about buying as much property as soon as you can.

Fine if that's how you feel. The impression you always give, though, is that you'd like to buy rather than rent but find it impossible.

I think it's difficult to totally differentiate buying for shelter and for overall investment. On a personal basis I value highly the security and just the general pleasure of owning a place where no one can tell you what you may do with it, a garden you can make beautiful and which provides privacy, but at the same time, unless you never intend to sell that it should appreciate in value over time also is relevant.
Someone once offered me the advice "never buy an IP you wouldn't be prepared to live in yourself".

The problem with share housing is the type of person you will attract to sharing in a low demographic area is not good. Again, people will say "oh you're just being a snob and a precious gen y"

Or maybe they'd say "why couldn't that other person be someone just like yourself?" Many of us started out in less salubrious areas many of which offered good capital gain.

The % of people who are just grown adults earning a modest income looking for a place to live is small and identifying them from the above is nearly impossible no one goes to an interview and says "Yup I'm a drug addict who will destroy your rented home and get you in trouble with the agent or damage the place you just bought and not pay rent".

No, but you're going to surely get a pretty good impression of someone in an interview. I shared with some great people when living in Sydney at about the age you are now, had a lot of fun and saved money toward buying eventually.

I don't think anyone is saying it's easy, Magoo, to get into property for the first time. Just that there are different ways to approach it and that what you see as impossible others see as a hurdle which they'll find a way to get over.

Btw my earlier comment about gen Y spending on take away coffee etc was not intended as necessarily criticism. We can all spend on what we choose. Rather I was attempting to illustrate the huge difference in the lifestyle of what we might call 'the war generation', those who went through two world wars, where they learned stoicism and determination in the face of adversity, and whose lives were uncomplicated by sophisticated electronics, take away anything other than fish and chips, and whose lives revolved around their family and their community.

 

[Mrmagoo]

even at todays prices, it still works out cheaper to own than to rent, if you worked out how much you would have to pay in rent over 25 years, I bet it is a lot more than the cost of ownership over that time, and that's before you add in the inflation hedging.

It required a pretty high % gain to break even, simply because as an owner you have a lot of over head costs.

I agree in principle that you should always buy and you will always be better off buying for a lot of reasons which is the entire point of this thread. I don't know why you can't understand that. People want to buy it is just too expensive.

Do you think people have resigned themselves to a life of renting because they hate the idea of owning ?

 

[sydboy007]

even at todays prices, it still works out cheaper to own than to rent, if you worked out how much you would have to pay in rent over 25 years, I bet it is a lot more than the cost of ownership over that time, and that's before you add in the inflation hedging.

depends if you're comparing apples to apples.

Most people can comfortably afford to rent in a better location than they can afford to buy. A guy I used to work with was living in a nice apartment with his GF at St Leonards. His travel time to work was 20 mins door to door. The GF wanted to have their own place and the they ended up on the central coast. His travel time was now up to 1.5 hours or so each way IF the trains ran on time and he could leave work a little early since the 1 per hour train left exactly on the hour and he had a 15 minute walk to the station.

Someone buying a property to live in is likely to see their transport costs increase, especially if they're now reliant on a car and paying exorbitant toll roads.

For myself, in real terms my house has roughly doubled in value in 17 years. The shares I sold eg ANZ / BHP / WOL to fund the deposit and stamp duty have all made much higher returns over that period. I'm pretty confident to say that if I'd invested the difference between my rent and the mortgage into shares and bonds over that period I'd be in a much better financial position now. Would have had an extra $22K to invest rather than lost to buying costs, along with no council & water rates, building insurance costs, repairing toilets / dead water heaters / dishwashers etc. All those costs generally get ignored when looking at the benefits of owning property. They add up and take away from the ability to reduce the compounding of interest on the mortgage.

Certainly the non financial reasons for owning a home are nice, and I went from moving 5 times in a few years to stability for 17, but those benefits don't put food on the table or get you closer to a comfortable retirement.

The advantages of compounding works nicely with investing if you have the ability to reinvest all the income generated. You get similar with paying off a mortgage, but I'd prefer to start with a small number and see it increasing with compounding, than taking a large number and trying to get ahead of compound interest.

If the value of the land you own doesn't go up, then you'll be in strife with property, because the actual building is pretty much losing value every year. Any policy that makes land use easier, say allows knock downs of older housing for higher density dwellings will cause land price inflation to slow or reverse. Probably wont happen in my lifetime, but I try to remain hopeful.

 

[sydboy007]

That is a big assumption, banks usually get them to spell out the income from the properties and various other financial factors for them to approve the loan.

The bank is not interested in the yield, only in your ability to make up the difference. The rent they provide the bank is probably from the realestate agent they're buying through, unless the property is currently let. I've experience too many people at various jobs talking about a property they're buying and when I ask what's the net yield after all costs and they're not able to tell me. They generally know how many thousands in tax they'll "save"

don't worry there are always people who tell you not to buy because it is too expensive on the way up and not to buy because it will go lower on the way down

happens with shares and bonds as well.

 

[Mrmagoo]

depends if you're comparing apples to apples.

Most people can comfortably afford to rent in a better location than they can afford to buy. A guy I used to work with was living in a nice apartment with his GF at St Leonards. His travel time to work was 20 mins door to door. The GF wanted to have their own place and the they ended up on the central coast. His travel time was now up to 1.5 hours or so each way IF the trains ran on time and he could leave work a little early since the 1 per hour train left exactly on the hour and he had a 15 minute walk to the station.

Hahhaha. That was exactly my life. Except I'd usually get home at about 9pm, 8pm on a good day.

Gotta love these "just move further out" people. They have no clue.

 

[Value Collector]

depends if you're comparing apples to apples.

Most people can comfortably afford to rent in a better location than they can afford to buy. A guy I used to work with was living in a nice apartment with his GF at St Leonards. His travel time to work was 20 mins door to door. The GF wanted to have their own place and the they ended up on the central coast. His travel time was now up to 1.5 hours or so each way.

I am saying it would be cheaper for them to own that apartment they were renting, than it is to rent it for 25years.

No doubt moving to the central coast put them in an entirely different sort of property, I am guessing a house. If it's a house they wanted, then that's what it may take, because you can't get a house and land near st leonards for the average wage, there is far to much demand.

Someone buying a property to live in is likely to see their transport costs increase, especially if they're now reliant on a car and paying exorbitant toll roads.

only if they are moving into a different sort of property, eg moving from an apartment to a house, or they were over renting to begin with.

If people are getting stuck on the idea that they must have a house and land, then yes they will have to move further out, it's simple maths, not everyone can live on a 1/4 acre block within 20kms of the cbd. and if they try, prices and the debt needed with go through the roof.

For myself, in real terms my house has roughly doubled in value in 17 years. The shares I sold eg ANZ / BHP / WOL to fund the deposit and stamp duty have all made much higher returns over that period. I'm pretty confident to say that if I'd invested the difference between my rent and the mortgage into shares and bonds over that period I'd be in a much better financial position now.

Maybe, but as I said you have to factor in increased rent, and the possibility of choosing the wrong stock the average punter doesn't make the best share market investor, and the average punter probably would have freaked and sold during the gfc,also most people can not stand the temptation of seeing $100K of shares without selling to buy a car or a holiday where as the unseen equity doesn't have the same temptations.

along with no council & water rates, building insurance costs, repairing toilets / dead water heaters / dishwashers etc.

all those would be more than covered by the rent your not paying.

work out how much 25 years rent would cost, then compare it to the interest on a 25 year loan and 25years holding costs, you will find the rent is a much larger figure.

The advantages of compounding works nicely with investing if you have the ability to reinvest all the income generated. You get similar with paying off a mortgage, but I'd prefer to start with a small number and see it increasing with compounding, than taking a large number and trying to get ahead of compound interest.

Mortgage interest doesn't compound.

If the value of the land you own doesn't go up, then you'll be in strife with property, because the actual building is pretty much losing value every year

I own a few rental properties, and I can tell you the rent received is a lot more than any building maintenance,

It's like saying your going to lease a car, instead of owning it outright because then you don't have to pay maintenance, owning a car out right would be cheaper than renting one.

 

[Value Collector]

Hahhaha. That was exactly my life. Except I'd usually get home at about 9pm, 8pm on a good day.

Gotta love these "just move further out" people. They have no clue.

so your saying you earn $100K, and live 1.5hours away from where you work and you still can't afford to buy???

I think you have a spending problem, not a housing cost problem.

 

[Value Collector]

It required a pretty high % gain to break even, simply because as an owner you have a lot of over head costs.

I agree in principle that you should always buy and you will always be better off buying for a lot of reasons which is the entire point of this thread. I don't know why you can't understand that. People want to buy it is just too expensive.

Do you think people have resigned themselves to a life of renting because they hate the idea of owning ?

I just did some quick calculations,

If you Bought a $500,000 house, and paid it off over 25years, your total interest bill would be $394,600

If you rented that house and paid $550 / week ( and never had a rental increase ), your rent would be $715,000

So you would have $320,400 spare to pay rates and repairs with, which in reality wouldn't come close to that. Also your now in the position of owning your home, no more interest, just maintenance and rates, where the renter has to continue putting in $550 a week / another $715,000 for the next 25years.

Now that's a pretty good result for the owner, but lets factor in inflation.


After 25 years of 3% inflation, the owners property is now worth $1,046,888, it's gone up $546,888 which completely offsets the $394,600 interest they paid.

and the renter's rental payment of $550 in year one would have gone up to $1046 / week by year 25. So his actual rent paid over 25 years will be $1,048,000.

so over 25 years the owner will pay $394,000 Interest + holding costs, but he will have an extra $546,888 on top of the principle he paid in, and now can live paying only maintenance and holding costs.

and over 25 years the renter will pay $1,048,000 in rent, but have not have any extra asset value. and now needs to continue paying rent at an ever increasing amount due to inflation.

-----

now, lets think about it, the renter has to pay $1,048,000 in rent, and will always have a large portion of his earnings going in rent, while the owner after the first few years is enjoying a much cheaper housing cost, Who is going to be in a better place to salary sacrifice into super, or build an investment portfolio.

The owner is going to be better placed to use their earnings to build wealth.

-------

the calculations above are only based on inflation.

If we had price increases caused by population growth, which translated to rent and capital growth increases of 1% or 2% more than inflation, It would be even more in the owners favour, by a very good margin.

 

[Mrmagoo]

so your saying you earn $100K, and live 1.5hours away from where you work and you still can't afford to buy???

I think you have a spending problem, not a housing cost problem.

That is a personal attack and I would appreciate it if you kept those out of the discussion.

You make a lot of assumptions in your analysis which might not be true. You also do not include expenses if you don't like them. If it were as simple as interest rate vs rent and I could own a home outright by just paying interest on fixed sum, then great.

 

[Mrmagoo]

Add to that :

Rates : 75 per week.

Body corporate : 50 per week.

Maintenance and improvement over the life probably another 5k a year.

Then if you do any major renovations. Not to mention the garden.

Then you need to look at any difference between rent and all of the total payments and apply a rate of return to that too.

 

[Value Collector]

Add to that :

Rates : 75 per week.

Body corporate : 50 per week.

Maintenance and improvement over the life probably another 5k a year.

Then if you do any major renovations. Not to mention the garden.

Then you need to look at any difference between rent and all of the total payments and apply a rate of return to that too.

I think $5000 / year is a gross over exaggeration, especially if your factoring in an amount for major renovation and body corp which covers a lot of the maintenance, but even so, there is still a lot in the owners budget left for that.