The future of Australian property prices

[CanOz]

I might add that if we had to locate to Sydney for work etc.,(quite possible in the next three years) we would likely buy in the CBD, with some leverage (2-3 bdrm apartment). We would live there for a few years and pay heaps off the mortgage. Then we'd either hang on or flog it off later depending on the market at the time.

CanOz

 

[syd]

Thanks for the welcome

An adjustment to my below post; 4.4% p.a. is 10 year growth rate for Sydney inner ring, greater Sydney is 3.3% p.a..

I can't work out how to quote postings, so apologies if the below is a little messy

large portion of the community prefer to own rather than rent for many reasons, most of which are not purely related to finance

Are you're saying people are unable to reconcile their non-financial reasons for ownership with the financial cost of ownership? The obvious answer I see is that if you think it costs too much to buy then rent, but I can understand that's not an ideal answer for some.

If housing goes up then some gain whilst others lose and to a large extent there's a generational divide there

I've taken inflation (www.rba.gov.au/calculator/quarterDecimal.html) into account in my calculation and arrived at real 10 year growth rates of 1.6% p.a. for Sydney inner ring and 0.5% for greater Sydney. Even with the benefit of rental income and government subsidies/preferential treatment it doesn't look like the older generation are making a killing from Sydney property.

I think part of the problem is big numbers. If I told you I bought a property for $1,000,000 10 years ago and sold it today for $1,550,000 you'd congratulate me; I made $550,000! But if I told you I made a real gain on my investment of 1.6% p.a. you'd buy me a drink to help me get over how poor the growth was. It's the same return.

we would likely buy in the CBD, with some leverage (2-3 bdrm apartment)

The real 10 year growth rate of CBD strata has been the same as Sydney inner ring; 1.6%. Can you explain why you'd buy?

 

[Vixs]

Thanks for the welcome

An adjustment to my below post; 4.4% p.a. is 10 year growth rate for Sydney inner ring, greater Sydney is 3.3% p.a..

I can't work out how to quote postings, so apologies if the below is a little messy



Are you're saying people are unable to reconcile their non-financial reasons for ownership with the financial cost of ownership? The obvious answer I see is that if you think it costs too much to buy then rent, but I can understand that's not an ideal answer for some.



I've taken inflation (www.rba.gov.au/calculator/quarterDecimal.html) into account in my calculation and arrived at real 10 year growth rates of 1.6% p.a. for Sydney inner ring and 0.5% for greater Sydney. Even with the benefit of rental income and government subsidies/preferential treatment it doesn't look like the older generation are making a killing from Sydney property.

I think part of the problem is big numbers. If I told you I bought a property for $1,000,000 10 years ago and sold it today for $1,550,000 you'd congratulate me; I made $550,000! But if I told you I made a real gain on my investment of 1.6% p.a. you'd buy me a drink to help me get over how poor the growth was. It's the same return.



The real 10 year growth rate of CBD strata has been the same as Sydney inner ring; 1.6%. Can you explain why you'd buy?

Fair enough points - 1.6% real return on a price basis isn't that exciting (although it is still a real return above inflation). The return on equity invested is a more meaningful number though, and laying down a $100,000 deposit for that $1m property and holding it through that period is generating a much greater real return than 1.6% on the capital used to make the purchase. At that price point of course yields are pretty terrible, so there are some holding costs along the way.

Assuming the cost of holding the investment outstrips the yield and you've got an annual cash return of -2% on the $1m purchase price... For the sake of a simple argument the cost to hold the property over that 10 years is $200,000 of which the tax man returns them 39% (37%+2% medicare levy) or $78,000. The net holding costs would be $122,000.

For putting down $100,000 and running a net loss of $122,000 over a 10 year period, you've now got $550,000 worth of capital gains and $650,000 equity, $900,000 debt.

Sell house, repay loan and deduct 2.5% for selling costs and you've got $611,250 in the bank. Pay your discounted CGT bill on the proceeds, that's 50% of the gain taxed at the same MTR, $107,250 gone. $504,000 in the bank. Your $100,000 deposit and $122,000 net holding costs are now $504,000 after tax. 227% return over 10 years or an annualised nominal return of 8.54%, real return of 5.54%.

The maths are all rough and there are a lot of things to consider (opportunity cost of what the losses to hold the property could have returned had they been saved/invested, factoring in rental increases and gradual reduction in holding costs as a result etc etc) but the point is the numbers stack up - not without risk, but they stack up.
The added value of having security available to access further finance and buy more is also a lure - there's a few more deposits locked up in the equity in that property...What does it look like in another 10 years with 5 properties?

I'm not a property bull, I don't believe residential housing should be the investment that it is when many people are kept poor as a result of not being able to buy a home, but the numbers make sense even when you increase the holding costs and drop back the return a bit. There are a few levers that would change the viability, the first being the removal of negative gearing increasing the real holding costs to $300,000. That would result in a 5.32%p.a. return over 10 years or a 2.32%p.a. real return. That's not looking as rewarding now, but the reality is rental increases over that period would take some of the sting out of that.

The other lever to adjust would be removing the CGT discount resulting in our $504,000 actually dropping to $396,750. Assuming negative gearing is still in play and the holding costs were $222,000 then that's a 5.98% p.a. nominal return, 2.98% real return. Better than the outcome above.

The only circumstance where those figures don't add up is if they removed negative gearing and the CGT discount, in which case the effective cost of $300,000 to get an after tax $396,750 would mean a nominal return of 2.83% and a negative real return. Not adequate reward for carrying nearly a million dollars debt for a decade and the risk that entails.

Reducing the amount of leverage to increase the required deposit would also have the effect of watering down returns and is another lever that could be tweaked, but I've got places to be today and no more time for excel, even if it is interesting to me!

 

[DB008]

Portugal Finds Chinese Make 90% of Bids at Property Sale

As bargain-hunters waited in a packed room at a property auction in Lisbon last month, one language dominated their chat: Mandarin.

About 90 percent of the bidders for the government-owned apartments and stores on offer were Chinese, according to Jorge Oliveira, the official overseeing the asset sale. They ended up acquiring more than two-thirds of the 45 properties, he said.

“A Portuguese investor bought a store to start a bakery and coffee shop, but most of the properties went to the Chinese,” Oliveira said in an interview after the sale.

Portugal is the latest target for Chinese investors who have been acquiring buildings around the world as China allows freer movement of funds in and out of the country.

The Chinese accounted for almost one in five foreign property purchases in Portugal during the first nine months, according to the Lisbon-based Portuguese Real Estate Professionals and Brokers Association. They already represent the biggest group of foreign buyers based on money invested, said Luis Lima, head of the association.

Bing Wong, a 52-year-old store-owner from Shanghai who attended the Oct. 24 auction, has been buying properties in Lisbon to create a network of outlets to serve the biggest concentration of Chinese residents in Portugal.

http://www.bloomberg.com/news/2014-11-03/portugal-sees-chinese-do-90-of-bids-at-property-auction.html

 

[Tyler Durden]

The Reserve Bank has warned that Australians face unprecedented mortgage pressure over the next decade as lagging wages growth fails to keep up with record household debt, making it harder to pay down mortgages as interest rates inevitably rise.

The Reserve Bank said on Friday that in New South Wales and Victoria – where house prices have risen much faster over the last year than the rest of the country – the share of income required to service an average home loan over the next 10 years "is close to historical highs."

The reality check comes after ANZ chief Phil Chronican warned that Australians have an "irrational obsession" with property investment, calling for a frank debate about tax distortions that pump up house prices.

The Reserve Bank's latest statement on monetary policy shows that homeowners in Sydney and Melbourne will find it harder to service their mortgage debts in coming years.

It said that, although interest rates are at a record lows, the "expected repayment burden" on home loans in Australia is actually at 10‑year average levels.

http://www.smh.com.au/business/rese...e-warning-to-home-owners-20141107-11ipxl.html

If people need to use a bigger share of their income to pay off their mortgages in the coming years, then they will have less to spend on other things...which may lead to the 'R' word?

 

[Mrmagoo]

yeah right, they'll just revise the way they count growth and claim we narrowly avoided recession thanks to cutting red tape

 

[DB008]

There are no good landlords. None of them fix anything. They pretty much don't get it that tenants don't own the house, therefore don't pay for capital improvements or maintenance.

What makes it worse is they want the laws changed so that they can make tenants pay for removable parts.

What a load of rubbish!!!

If you rent a unit/townhouse/villa in a complex in QLD, most of them, if not all, have an onsite manager.

You can actually purchase the on-site management, they are called 'Management Rights'.

You also need to hold a Restricted Real Estate License because you handle the rent/trust accounts and control the letting pool.

Here are some agents who specialise in management rights;

Venz - http://www.venz.com.au/directory/

The Onsite Manager - http://www.theonsitemanager.com.au/

MrSales - http://www.mrsales.com.au/search/

RAAS Rights - http://www.raasrights.com.au/content.php

 

[Taltan]

This is my first post on this site in about 3 years however I have to acknowledge I was a property bear who debated with many on this site to the point where the old property prices forum was shut down in 2009.

I have to admit I was wrong the craziness has continued and yields have got lower and lower and buyers keep buying. Prices have not run away but they have performed better then trend. I did not think 18+ good years would turn into 23 and counting.

 

[Vixs]

This is my first post on this site in about 3 years however I have to acknowledge I was a property bear who debated with many on this site to the point where the old property prices forum was shut down in 2009.

I have to admit I was wrong the craziness has continued and yields have got lower and lower and buyers keep buying. Prices have not run away but they have performed better then trend. I did not think 18+ good years would turn into 23 and counting.

That's it, right? We might not like property prices as they are, but without policy change it's tough to bet against them!

 

[sydboy007]

How long before investors decide 7%+ price growth is no longer sustainable?

Seems there's a very strong link between the level of investors in the market and house price growth.

Funny how negative gearing doesn't affect house prices, yet it will cause a mass exodus from the market if it's curtailed in some way.

 

[sydboy007]

http://www.macrobusiness.com.au/2014/11/the-melbourne-ghost-city-revealed/

Prosper Australia has released its annual speculative vacancies report, authored by Catherine Cashmore, which has revealed that parts of Melbourne’s inner-city apartment complexes are becoming ‘ghost towers’, with large numbers of unused or barely used homes.

The report is unique because it uses water use data from Melbourne’s three main metropolitan water retailers to determine whether a home is being used, with very low recordings of water consumption data used as a proxy to determine vacant dwellings.

Speculative Vacancies (SVs) are measured as properties with abnormally low water usage. That is, any residential landholding using less than 50 litres per day (LpD), averaged over a 12 month period is deemed a speculative vacancy. In many cases, these are likely held for speculative gain by property investors.

Because these properties are not for rent, they are overlooked by current short-term vacancy measures reported by real estate firms.

Analysis was undertaken of 94.4% of 1,475,771 residential properties in 393 suburbs over the calendar year of 2013. Data indicates 64,386, or 4.4 per cent of Melbourne’s housing stock is potentially vacant and unused.

An examination of 126,529 non-residential properties in 399 suburbs over the same period identifies 29,357 or 23.2 per cent of Melbourne’s commercial stock is also potentially vacant and unused.

 

[qldfrog]

http://www.macrobusiness.com.au/2014/11/the-melbourne-ghost-city-revealed/

An examination of 126,529 non-residential properties in 399 suburbs over the same period identifies 29,357 or 23.2 per cent of Melbourne’s commercial stock is also potentially vacant and unused.

Sydboy, just a note;
I own an investment non residential property in qld
as every other lot in the precinct, it is connected to the water/sewerage and I do pay for the fact that I am connected but that unit consumption is 0;
the pipe is not connected to anything;
even if it was I doubt that 50l a day would be used.
While the water usage is a good indicator of residential use, it is basically useless for commercial/industrial lots which have huge variation in potential use; from 0 to massive based on industry

 

[satanoperca]

A simpler way if the information was available would be :

1. Is the power connected, if no, it is vacant. This applies for both residential or commercial.
2. If power is connected and the power usage is less than a 60 watt light bulb on average over a 3 month period, then it is deemed vacant, applicable to both residential and commercial.

Or

Simply apply a broad based land tax and who cares if they sit empty. Landlord has a choice, meet the market on rental price to cover the tax or not.

 

[Smurf1976]

The emergence and popularity of rainwater capture systems for properties still connected to mains water makes water consumption data less useful than it was in the past. It's entirely possible that someone has zero water consumption as measured, but is still living in the property if they are using rainwater to supply all their water consumption (plausible if there's not a drought, it's a free standing building with a roof and they don't water the garden).

Same with electricity. Someone installs solar and has minimal nighttime power use due to lifestyle (eg shift worker). They'll use very little electricity from the grid, especially if they also have gas / solar hot water etc too.

That said, I don't doubt that there are properties sitting empty and neither for sale nor for rent.

 

[qldfrog]

A simpler way if the information was available would be :

1. Is the power connected, if no, it is vacant. This applies for both residential or commercial.
2. If power is connected and the power usage is less than a 60 watt light bulb on average over a 3 month period, then it is deemed vacant, applicable to both residential and commercial.

Or

Simply apply a broad based land tax and who cares if they sit empty. Landlord has a choice, meet the market on rental price to cover the tax or not.

as a landlord, I would not disconnect when looking for a tenant;
usage yes,but not connection
about
"
Simply apply a broad based land tax and who cares if they sit empty. Landlord has a choice, meet the market on rental price to cover the tax or not.
"
guess what, this is already happening, as land tax but also for water bill, for rates and mostly for electricity,
So the need for higher rent to cover these

 

[satanoperca]

That said, I don't doubt that there are properties sitting empty and neither for sale nor for rent.

This is a naive statement, just debunk any statistical measure, Oh please, last I check God made me.

I lived in the Docklands, Victoria for 8 years, was president of the body corporate of one of the towers for several years. At all times at least 1 in 10 properties was empty, this figure often got as high as 3 in 10. The vast majority of investors where overseas investors who preferred to leave the property empty than deal with annoying tenants.

I sold my apartment to a Chinese investor who wanted to pay cash and registered it in their daughters name who was study here. It has remained empty for 2 years and this is significant as the body corporate was $12K p.a.

Friends recently took possession of their dream 2 bedroom apartment in Fitzroy and then wanted to move out within weeks and finding out over 50% of the apartments would remain empty due to mainly overseas investments and the complex was soulless without people who can create a community.

Doubt is equal to an assumption, research further before making guesses.

 

[Smurf1976]

This is a naive statement, just debunk any statistical measure

I suggest you read my post a little more carefully and note the use of the word "don't".

 

[satanoperca]

I suggest you read my post a little more carefully and note the use of the word "don't".

Yes you are correct, turns and bend over waiting for the kick up the ****, my apologies

 

[sptrawler]

as a landlord, I would not disconnect when looking for a tenant;
usage yes,but not connection
about
"
Simply apply a broad based land tax and who cares if they sit empty. Landlord has a choice, meet the market on rental price to cover the tax or not.
"
guess what, this is already happening, as land tax but also for water bill, for rates and mostly for electricity,
So the need for higher rent to cover these

I agree a broad based land tax may put a lot of upward pressure on rents. I'm sure the government would rather tackle negative gearing.

Property has become a never fail, can't go down investment. Why put money in the bank, just keep gearing up.:1zhelp:

 

[Quincy]

Just because rules are in place doesn't mean they are being policed. It is illegal for people to sell drugs, but many still do and yes some get caught.

I wonder how many foreigners by vacant land and do develop within the defined period. Who is policing. I assume no one.

FIRB is data matching don't you know ? Every settlement is monitored and recorded as well as identity is checked by passports and birth certificates these days.


http://ministers.treasury.gov.au/Di...0/074.htm&pageID=003&min=njsa&Year=&DocType=0

FIRB ‘failing’ to enforce rules on foreigners buying Australian homes

http://www.theaustralian.com.au/nat...australian-homes/story-fn59nm2j-1227135170289

My bolding shown in referenced article.

NEW details have emerged of the near-total inaction of the Foreign Investment Review Board in penalising foreign investors who illegally buy established homes in Australia.

The FIRB has told the chair of a parliament committee inquiring into foreign investment in real estate that is has not asked a single offshore investor to sell off an illegally acquired house since 2008.

The Australian has previously revealed that the FIRB has not conducted a single prosecution since 2006 despite a flood of foreign buying that has seen overseas investors purchase tens of thousands of established homes in Australia.

House economics committee chairwoman Kelly O’Dwyer said the revelation was more evidence of serious deficiencies in the FIRB’s approach to enforcing laws about investment in established homes.

“With respect to residential real estate, the Foreign Investment Review Board has failed in its responsibility of monitoring and ensuring compliance of Australia’s foreign investment framework,’’ she said.

“Not a single compulsory sale of illegally purchased housing since 2008 and an inability to provide data on voluntary sales, it all points to a failure of leadership at FIRB on the issue of foreign investment in residential real estate.”

While Australia allows foreign investment in off-the-plan housing, foreigners are banned from buying established homes in all but a narrow range of circumstances.

The main loophole, which has been exploited ruthlessly by offshore investors and their local facilitators, is a clause allowing temporary residents to buy a home to live in while in Australia.

The rules demand that these investors sell the home within three months of leaving Australia, but the revelation that there have been no forced divestments of properties since 2008 exposes the gaps in the FIRB’s enforcement.

In 2008/9, foreign investors bought 2450 established homes worth $1.81 billion. By 2012/13 that figure had risen to more than 5000 homes to a value of $5.42bn, amid a wave of buying from Chinese investors, some of whom are anxious to park their accumulated wealth out of reach of Chinese authorities.

Earlier this month The Australian revealed that the department of immigration does not share data with the FIRB on when property owners’ visas expire or when they leave the country.

Buyer advocates in areas dominated by Chinese buyers report their presence is adding at least 10 per cent to property prices, as local bidders struggle to compete against the flood of money from China.

Offshore buying brings together the themes of housing affordability, immigration and foreign investment and has thus rapidly become a hot-button issue politically, something MPs are beginning to realise.

The house economics committee is expected to hand down its report later this week. As reported by The Australian, the report is expected to contain a tough new civil compliance regime to target law-breakers with large fines. Foreign investors would also be charged an application fee of up $1500 per successful application under its recommendations.

The report is expected to be heavily critical of the FIRB’s performance under chairman Brian Wilson, a former investment banker who has overseen its ultra light-touch regulation of investment in established housing in Australia.