The future of Australian property prices

[Value Collector]

wait. what's "financed 100%"? You mean 100% equity financing?

.

No, I am talking about your example of using a mortgage to buy it.

Off course if you use a 5% mortgage to fund something producing a 2% return, you may struggle to get a sound result in a reasonable time.

However if you funded it with your own equity, you might get a result the was ok, (attest compared to holding the cash)

Debt financing, leverage, can do wonders.

Only when the return on capital is higher than the interest rate paid on the debt.

Just I reckon it's better, and safer, to see all financing as my own equity with a cost on it. That mean that if the debt can be had for cheaper, that's just icing on top.

I look at each asset and simply ask "will owning this asset generate a better return than holding the cash I am swapping it for?"

Forgetting about price Bubbles for a second,

Lets imagine a car space did offer a 1.7% free cashflow return after all out goings, and the capital value of the car space would at least increase with inflation, and the cashflow would increase with inflation.

if that were true we would have basically an inflation hedged bond, albeit a low return bond, but given its inflation hedging ability, it would be far better than a bank account or even a 5% bond where the capital is eaten away by inflation, the after tax return of the car space at 1.7% cash flow would be about equal to a 6% bond once inflation and tax is adjusted for.

Once we have decided that the asset its self is a good investment, only then should we decide to use leverage or not, now if we could get financing at 1% maybe we would, if it was only available at 5% we wouldn't.

 

[luutzu]

No, I am talking about your example of using a mortgage to buy it.

Off course if you use a 5% mortgage to fund something producing a 2% return, you may struggle to get a sound result in a reasonable time.

However if you funded it with your own equity, you might get a result the was ok, (attest compared to holding the cash)

Only when the return on capital is higher than the interest rate paid on the debt.

I look at each asset and simply ask "will owning this asset generate a better return than holding the cash I am swapping it for?"

Forgetting about price Bubbles for a second,

Lets imagine a car space did offer a 1.7% free cashflow return after all out goings, and the capital value of the car space would at least increase with inflation, and the cashflow would increase with inflation.

if that were true we would have basically an inflation hedged bond, albeit a low return bond, but given its inflation hedging ability, it would be far better than a bank account or even a 5% bond where the capital is eaten away by inflation, the after tax return of the car space at 1.7% cash flow would be about equal to a 6% bond once inflation and tax is adjusted for.

Once we have decided that the asset its self is a good investment, only then should we decide to use leverage or not, now if we could get financing at 1% maybe we would, if it was only available at 5% we wouldn't.

Good points.

You raised a point I've been thinking, thought I settled on an answer but seeing how smarter people I've talked to tend not to see it that way...

You were saying that if an investor purchase, say that car spot, and it returns say 2%. It's fully funded (i.e. no debt) and the only other alternative at the moment, and into a foreseeable future, is a lowly bank deposit.

So a 2% return looks pretty good. Especially because it's not from borrowed money where if we were to borrow it'd cost us, say, 4%... and our alternative is 1.7% at the bank.

That makes sense, technically. But my thinking is that shouldn't an investor have a price on their own equity and only invest it towards assets that, assuming the investor accurately appraised it, return above that required rate of return [cost +].

So it'd be better to put it in a bank deposit box; or in short term bonds... where, yes, it doesn't do much but when you find the opportunity you are pretty much guaranteed you can take that parked cash/principal out intact, with a few bucks in interests... and invest it in a more profitable [above or at your required cost].

To put in an asset that may or may not fetch the original invested capital when you need it... and in the meantime it return a fairly low return you set for yourself. That might not work out well in the longer term.


I'm raising this because I know a fair few property investors who own property/ies they bought some years back. Owed little to nothing on it... have a return that's pretty low compare to the current capital gained/market price... but are pretty high compare to when the price they first bought it at. e.g. Say they bought a property for $300K some decades back. It now yield 10% if we compare to that $300K. But yield, say, 2% on the current $1M quoted price.

Assuming that the investor is not being lazy, can't be asked and are aiming to maximise return....

Question is, it does not make sense for them to say that... well, it return me 10% on my investment [made years ago] so I'm way ahead.

Or... a property investor who had made capital gain but whose current rental yield is still low saying that, one day when it's all paid off I'll get rental money for nothing.

 

[Value Collector]

Good points.

You raised a point I've been thinking, thought I settled on an answer but seeing how smarter people I've talked to tend not to see it that way...

You were saying that if an investor purchase, say that car spot, and it returns say 2%. It's fully funded (i.e. no debt) and the only other alternative at the moment, and into a foreseeable future, is a lowly bank deposit.

So a 2% return looks pretty good. Especially because it's not from borrowed money where if we were to borrow it'd cost us, say, 4%... and our alternative is 1.7% at the bank.

That makes sense, technically. But my thinking is that shouldn't an investor have a price on their own equity and only invest it towards assets that, assuming the investor accurately appraised it, return above that required rate of return [cost +].

So it'd be better to put it in a bank deposit box; or in short term bonds... where, yes, it doesn't do much but when you find the opportunity you are pretty much guaranteed you can take that parked cash/principal out intact, with a few bucks in interests... and invest it in a more profitable [above or at your required cost].

To put in an asset that may or may not fetch the original invested capital when you need it... and in the meantime it return a fairly low return you set for yourself. That might not work out well in the longer term.


I'm raising this because I know a fair few property investors who own property/ies they bought some years back. Owed little to nothing on it... have a return that's pretty low compare to the current capital gained/market price... but are pretty high compare to when the price they first bought it at. e.g. Say they bought a property for $300K some decades back. It now yield 10% if we compare to that $300K. But yield, say, 2% on the current $1M quoted price.

Assuming that the investor is not being lazy, can't be asked and are aiming to maximise return....

Question is, it does not make sense for them to say that... well, it return me 10% on my investment [made years ago] so I'm way ahead.

Or... a property investor who had made capital gain but whose current rental yield is still low saying that, one day when it's all paid off I'll get rental money for nothing.

Sure you can and probably should have a minimum likely investment return you are willing to accept.

But this amount will be different for each investor, based on many factors eg capital base, income requirements, risk vs reward, knowledge etc etc.

But my main point was that an asset can have a cash flow that can appear low, but if it truly has a built in inflation hedge, it can out perform fixed dollar assets that generate higher cash flows.

What you described above is basically how Buffett operates, hence the reason he is currently sitting on about $100 Billion of bonds earning about 1% (while inflation hits them at 2%) creating an after inflation negative return.

In an interview where he discussed buying into the airlines, he basically said although they weren’t his favorite businesses, he felt as a group the equity of the airlines he purchased will outperform the bonds he traded in to buy the airline stock.

I guess the bigger your cash pile grows the smaller the premium above the cash rate has to be to make you feel like swapping some of the cash, for investments earning at a higher rate, especially when bonds are producing negative real returns.

 

[greggles]

Some corners of the mainstream media now appear to be pushing a "the sky is falling" take on residential real estate prices. House prices are set to "tumble" and buyers are "fleeing". An interesting turn of events after years of endlessly plugging the real estate boom.

https://www.news.com.au/finance/eco...e/news-story/239b695952fd07ffd4b270fcfcdef637

 

[luutzu]

Some corners of the mainstream media now appear to be pushing a "the sky is falling" take on residential real estate prices. House prices are set to "tumble" and buyers are "fleeing". An interesting turn of events after years of endlessly plugging the real estate boom.

https://www.news.com.au/finance/eco...e/news-story/239b695952fd07ffd4b270fcfcdef637

Average OZ properties in the major cities will need to drop to about $500k to $800K to be affordable.

$500K for that standard blue-collar, working class hero, house in suburbia. $800K for the professional office type in "inner" suburbia.

Prices of late are floating on the back of cheap and easy financing plus a rigged tax-payer funded subsidy for higher income earner. That and lots of hope, dreams and an army of creative brokers who know how to use Acrobat Pro.

There are For Sale signs on a fair number of flats around where we live. I'm starting to see a few, not many, but a higher number, of properties being listed that are either half complete or with DA plans ready for that dream home.

 

[greggles]

Average OZ properties in the major cities will need to drop to about $500k to $800K to be affordable.

$500K for that standard blue-collar, working class hero, house in suburbia. $800K for the professional office type in "inner" suburbia.

Prices of late are floating on the back of cheap and easy financing plus a rigged tax-payer funded subsidy for higher income earner. That and lots of hope, dreams and an army of creative brokers who know how to use Acrobat Pro.

There are For Sale signs on a fair number of flats around where we live. I'm starting to see a few, not many, but a higher number, of properties being listed that are either half complete or with DA plans ready for that dream home.

Houses on a decent block near the CDB in any capital city won't be going backwards in price. Too much demand. Inner city units will struggle in the short to medium term but are a good long term bet as long as the quality of construction is there.

I think the price drops will occur in the middle ring where prices have been bid up unrealistically and beyond many people's ability to withstand interest rate rises. Those 10k from the CBD having paid $750K for a house needing work on a small block. That is where the defaults will begin when interest rate pressure starts to bite. Demand will cool and under stress borrowers will put the houses on the market just to get out and relocate or downsize or maybe even rent again. Better than than taking the kids out of their private school.

 

[luutzu]

Houses on a decent block near the CDB in any capital city won't be going backwards in price. Too much demand. Inner city units will struggle in the short to medium term but are a good long term bet as long as the quality of construction is there.

I think the price drops will occur in the middle ring where prices have been bid up unrealistically and beyond many people's ability to withstand interest rate rises. Those 10k from the CBD having paid $750K for a house needing work on a small block. That is where the defaults will begin when interest rate pressure starts to bite. Demand will cool and under stress borrowers will put the houses on the market just to get out and relocate or downsize or maybe even rent again. Better than than taking the kids out of their private school.

I saw surveys where those in wealthier suburbs are also having financial/mortgage stress just as much as those from lower-income suburbs.

The recent data I read somewhere showed that prices in richer suburbs are dropping at a faster rate than the poorer ones.

So it's either that those who bought higher priced houses can afford to get out sooner to take their gains while those in the poor suburbs are the typical owner/occupier who's trying everything they can to keep their one and only place.

But yea, you're probably right that the wealthier suburbs wouldn't see their prices go down to too much. But then it's hard to know what those suburbs are.

Brother in law was just saying that a brand new, double storey house on 450m2 block near his parents is asking for $2.7M. Still listing after a few months now. Just last year, a similar one a few doors down sold for $2.5M.

In Ryde, a property that was purchased for $1.5M a year ago just got repraised at $1.25M.

Property are often worth what someone else is willing to pay for it. So I reckon the moment investorsfeel the tide is turning, it's not going to calmly drop down to that fair and reasonable price.

 

[greggles]

I saw surveys where those in wealthier suburbs are also having financial/mortgage stress just as much as those from lower-income suburbs.

The recent data I read somewhere showed that prices in richer suburbs are dropping at a faster rate than the poorer ones.

So it's either that those who bought higher priced houses can afford to get out sooner to take their gains while those in the poor suburbs are the typical owner/occupier who's trying everything they can to keep their one and only place.

But yea, you're probably right that the wealthier suburbs wouldn't see their prices go down to too much. But then it's hard to know what those suburbs are.

Brother in law was just saying that a brand new, double storey house on 450m2 block near his parents is asking for $2.7M. Still listing after a few months now. Just last year, a similar one a few doors down sold for $2.5M.

In Ryde, a property that was purchased for $1.5M a year ago just got repraised at $1.25M.

Property are often worth what someone else is willing to pay for it. So I reckon the moment investorsfeel the tide is turning, it's not going to calmly drop down to that fair and reasonable price.

I'm thinking of a quality house on at least a 500 square metre block 5km or closer to the CBD. That is probably your best bet because the amount of stock is limited and demand is always high.

The ultra high end is definitely susceptible to big losses. If you're paying $2 million+ you can see big swings. But the rich can take a $150,000 hit and shrug their shoulders. You can also go backwards if you choose poorly and/or overpay.

Good quality house on a good size block less than 5km from the CBD is hard to lose on if you're prepared to hang on for five years. Just don't overpay and you'll be fine. Get in at market prices.

 

[luutzu]

I'm thinking of a quality house on at least a 500 square metre block 5km or closer to the CBD. That is probably your best bet because the amount of stock is limited and demand is always high.

The ultra high end is definitely susceptible to big losses. If you're paying $2 million+ you can see big swings. But the rich can take a $150,000 hit and shrug their shoulders. You can also go backwards if you choose poorly and/or overpay.

Good quality house on a good size block less than 5km from the CBD is hard to lose on if you're prepared to hang on for five years. Just don't overpay and you'll be fine. Get in at market prices.

Yea, property tend to do well over time if the investor/buyer manages to hang on through thick and thin. Not trying to be smart there, just agreeing with your point.

I mean, if it's a property people live in and they have enough savings and a steady job to repay; or if it's a property they owe little to nothing on... a correction or a crash wouldn't bother them much. It'd be like me with my few bucks in stocks. You just don't brag about it but don't really mind if it crashes 'cause you don't need the money yet.

Weren't too long ago when the idea of owing $500,000 to the bank scares the heck out of people, or at least me. Now it seems owing a million is just normal.

 

[luutzu]

Pretty good channel on Australian general economics and property.

Lots of facts and statistics. Little to no commentaries and opinions. That's always good I think.

Here's an interview with a buyer agent on his take on the current market condition.

 

[sptrawler]

Now it seems owing a million is just normal.

Only to the dumb, or those who can afford to carry it, or lose it.

It scares you, because you consider the outcomes(good or bad), the dumb ones only consider the upside.

You want to protect those that lose money, but you can only do that by stopping them borrowing, how do you do that without them complaining you are depriving them of opportunity to make money?

 

[luutzu]

Only to the dumb, or those who can afford to carry it, or lose it.

It scares you, because you consider the outcomes(good or bad), the dumb ones only consider the upside.

You want to protect those that lose money, but you can only do that by stopping them borrowing, how do you do that without them complaining you are depriving them of opportunity to make money?

Man that's so true.

I did try to tell a couple of people I consider I'm closed to... telling them a few years back to seriously sell one or two of their three or four properties. Time to take profit I reckon.

Yea, they look at me like I'm stealing from them. One asked how my stock thingy's going. Not cool man, that was the wrong time to measure my genius

 

[sptrawler]

Man that's so true.

I did try to tell a couple of people I consider I'm closed to... telling them a few years back to seriously sell one or two of their three or four properties. Time to take profit I reckon.

Yea, they look at me like I'm stealing from them. One asked how my stock thingy's going. Not cool man, that was the wrong time to measure my genius

A lot of would be investors have been caught in W.A.
Also the other people who have been caught, or have missed an opportunity IMO, are those who have not paid down their mortgage while interest rates are low.
But in W.A record numbers of people are going to Bali, and Australia has the Worlds highest growth rate, in passenger numbers taking cruises.

 

[luutzu]

A lot of would be investors have been caught in W.A.
Also the other people who have been caught, or have missed an opportunity IMO, are those who have not paid down their mortgage while interest rates are low.
But in W.A record numbers of people are going to Bali, and Australia has the Worlds highest growth rate, in passenger numbers taking cruises.

I guess those state planners "wealth effect" idea have their merits. Jack up the price, lure foreign capital and local debt serfs into the market. The price keeps going up, we all feel really rich so take a cruise, a holiday, charge up the credit cards... increase consumer purchases.

They don't really care how all that's going to end. But that's other people's problems I guess.

It wasn't long ago when a $600K brick house on a quarter acre seems a bit pricey. And getting a $400K mortgage makes me sweaty.

All those have since double or triple. Costs of living and everything else also goes up. Everything except wages and job security. Can't end well can it?

 

[sptrawler]

I guess those state planners "wealth effect" idea have their merits. Jack up the price, lure foreign capital and local debt serfs into the market. The price keeps going up, we all feel really rich so take a cruise, a holiday, charge up the credit cards... increase consumer purchases.

They don't really care how all that's going to end. But that's other people's problems I guess.

It wasn't long ago when a $600K brick house on a quarter acre seems a bit pricey. And getting a $400K mortgage makes me sweaty.

All those have since double or triple. Costs of living and everything else also goes up. Everything except wages and job security. Can't end well can it?

It will end o.k, it is always cyclical, the prices will never go back to what they were pre boom.
But they will go back to the point of equilibrium, where the market can afford them, at the new interest rate.
Those who over extended, lose some equity and either have to hang on, or sell out.
Those who purchased a house pre boom, won't notice anything and those waiting to get on the roundabout have to time it.
Those who spent all their equity, on holidays cars etc, will have a drop in living standards as the redraw option is withdrawn.
Life goes on, nothing much changes, dot com boom, housing boom, they all go boom eventually, when you run out of buyers.

 

[MrBurns]

It will end o.k, it is always cyclical, the prices will never go back to what they were pre boom.
But they will go back to the point of equilibrium, where the market can afford them, at the new interest rate.
Those who over extended, lose some equity and either have to hang on, or sell out.
Those who purchased a house pre boom, won't notice anything and those waiting to get on the roundabout have to time it.
Those who spent all their equity, on holidays cars etc, will have a drop in living standards as the redraw option is withdrawn.
Life goes on, nothing much changes, dot com boom, housing boom, they all go boom eventually, when you run out of buyers.

Dropped 30% last time plenty of people went broke, I think the build up this time is much worse but wait and see.

 

[luutzu]

It will end o.k, it is always cyclical, the prices will never go back to what they were pre boom.
But they will go back to the point of equilibrium, where the market can afford them, at the new interest rate.
Those who over extended, lose some equity and either have to hang on, or sell out.
Those who purchased a house pre boom, won't notice anything and those waiting to get on the roundabout have to time it.
Those who spent all their equity, on holidays cars etc, will have a drop in living standards as the redraw option is withdrawn.
Life goes on, nothing much changes, dot com boom, housing boom, they all go boom eventually, when you run out of buyers.

I have a feeling that this time, it will be different.

But yea, those who aren't over-leveraged, or could afford to pay their dues... It doesn't really matter, to the medium term, what happens in the market.

 

[sptrawler]

I have a feeling that this time, it will be different.

But yea, those who aren't over-leveraged, or could afford to pay their dues... It doesn't really matter, to the medium term, what happens in the market.

It wasn't long ago, that everyone was crying for those who couldn't get into the market, Now I bet those poor sods who couldn't get into a house are saying thank god.

https://thewest.com.au/business/housing-market/perth-houses-most-affordable-on-record-ng-b88901143z

Now we will hear all the same bleeding hearts, crying about all those people who are in financial trouble, for getting into the market.
Is there any wonder you get cynical about people's sympathy, how about letting people make their own decisions, and allowing them to be responsible for the outcomes.

 

[Smurf1976]

Shhh about this house prices falling stuff.

The photographer and person drawing the plans for house I’ve got for sale only left literally 15 minutes ago.

Should there be any slump on the way, could it please be kind enough to wait until I’ve got the place sold.

 

[sptrawler]

Shhh about this house prices falling stuff.

The photographer and person drawing the plans for house I’ve got for sale only left literally 15 minutes ago.

Should there be any slump on the way, could it please be kind enough to wait until I’ve got the place sold.

Smurph, do the Christmas lights go with the house?