The future of Australian property prices

[Tysonboss1]

Having trouble wrapping my tiny brain around a colossal meltdown in prices of 20% across the board. YES there will be some attrition due to people selling for lower prices for reasons outlined above. Hardly a bubble IMO !

Don't stress Bud.

When it comes to property you don't have to over analize things.

If you own property and are happy with the rental return, just sit their and collect rent.

If you are living in the property and are happy with the life style just sit there and enjoy the life style.

There is no need to trade property to try and time the market. the only factors that you need to believe to be a property investor is as follows.

The area you invest in will continue to have people wanting to rent dwelling in the future.

and

The rent that you are able to charge will increase with inflation.

and if you want capital gains ahead of inflation then you have to believe that the population will grow in your area.

Most populated parts of australia tick the above boxes

 

[satanoperca]

Having trouble wrapping my tiny brain around a colossal meltdown in prices of 20% across the board. YES there will be some attrition due to people selling for lower prices for reasons outlined above. Hardly a bubble IMO !

Never mentioned it was a bubble and 20% is only the last years growth and that is my point. Even if 20% was wiped off prices, it would essentially only effect those that bought in the last year. This is why it is such a good investment for those who got in pre GFC. If 20% can be added to prices so fast then why can it not be taken away just as fast.

As for people speculating on PPOR, ask young families if they would have both parents working to pay off a large mortgage if there was no chance of capital gains for the next five years. Answer, no. Australians have become the greatest speculators of property in the world, how else do you explain the massive growth in prices last year, fundamentals, ha. No the speculation of missing out, no getting on the property ladder, being priced out forever, rent is dead money etc etc etc.


Cheers

 

[haraldc]

You see what most people miss is this,

I have a house worth $480,000 which currently rents at $395 / week. The average person here will say " Ha, what a bad investment, he would be negatively geared because the interest on $480,000 is $33,600 / year and the rent is only $20,540"

But if you look deeper you will see the following.

I bought in 2001 for $218,000 with a deposit of $30,000 so the loan was only $188,000 and over the space of 10 years I have reduced it to less than $130,000.

So your current equity is 350,000.

How much you paid 10 year ago is irrelevant here. You mark to market and your current investment is 480k - 130k = 350k.

The idea is that you leveraged 30k over 10 years and brought it to 350k. That is a rate of return of 27.8%. Not bad

OK actually is not that: you have to subtract interest, compound value of that interest, maintenance and repairs, BCC bills, and all other frictional costs (e.g. buying/selling = entry/exit). But you probably done well

But be careful leverage works both ways.

So the current interest bill is $9,100 and the rent is $20,540 so there is positive cashflow of about $10,000 / year.

So you get 10k for a 350k investment. This is about 2.85% return.

ANZ currently offer 6% on term deposits on 1 year, at maturity.

You could double your return

So I have a $480,000 asset that requires no further capital input from me paying it's self off.

I don't understand: it doesn't need repairs, maintenance, BCC rates, utilities (water), etc ? (when I was renting it was the landlord paying this, who's doing it now ?)

So over all I invested $30,000 + $7000 stamp duty etc and then funded the initial neg cashflow in the first three years, Now I have a steady income stream that will continue to build as the loan decreases and it will grow with inflation.

So yes property is a very sound investment

Maybe, it depends on the development over the life of the investment.

The question is not if the investment returns something or not but:

1. How much it returns compared to a risk-free investment ? (normally that would be some AAA government bonds)

Currently your investment is under-performing.

In order for it to perform you need at least 3.5% more (to match the risk-free investment) plus some more to cover the ongoing costs and justify the risk taken. The more part may come from CG, rent or both.

How much is worth it is a matter of personal choice.

2. What is the risk / reward ?

What is the capital at risk under various scenarios and what is the projected return (realistic scenarios required

3. Are there better investments ? (better is user-defined here)

Regards

 

[cutz]

Still neg cashflow at 50%.

Hi Tysonboss,

I need help with some basic math,

A good mix of top 10 stocks will get you a yield conservatively estimated at 5% not including franking credits.

Therefore yield on a 100k (using nice round numbers) portfolio at a conservative 5% is $5000, not including franking credits.

Expense on a 50k loan using an unusually high interest rate of 9% (remember this can be negotiated and can be done for much less, esp. if using a LOC) is $4500.

But anyway, that's not the point I was trying to make, my point is negative gearing for both stocks and IP is a joke.

 

[Tysonboss1]

Hi Tysonboss,

I need help with some basic math,

A good mix of top 10 stocks will get you a yield conservatively estimated at 5% not including franking credits.

Therefore yield on a 100k (using nice round numbers) portfolio at a conservative 5% is $5000, not including franking credits.

Expense on a 50k loan using an unusually high interest rate of 9% (remember this can be negotiated and can be done for much less, esp. if using a LOC) is $4500.

But anyway, that's not the point I was trying to make, my point is negative gearing for both stocks and IP is a joke.

My example was BHP which is only 2.5% yeild not 5%.

Negative gearing has it's place, It should only ever be considered as a shorterm option though, just to get you started.

The property that I used in the example a few pages back, was negatively geared for the first three years but now provides a strong positive income stream.

Once you are over the hurdle of making your first property positive cashflow, you can use that extra cashflow to help bring another property into positive cashflow.

 

[Tysonboss1]

So you get 10k for a 350k investment. This is about 2.85% return.

ANZ currently offer 6% on term deposits on 1 year, at maturity.

You could double your return



I don't understand: it doesn't need repairs, maintenance, BCC rates, utilities (water), etc ? (when I was renting it was the landlord paying this, who's doing it now ?)

See the point of buying a property is that you are buying an inflation hedged income stream. This is the biggest point that gives property a huge advantage over a cash investment.

If you don't understand that your rental return and capital value of the investment will increase with inflation over time (through the ups and downs), but the value of your cash investment and the cashflow will not increase, then you don't understand property investment at all.

When I said it does not require any further capital from me I mean that the property is now self funding, the rent covers all costs including maintance, So it is providing an income stream net of costs.

 

[cutz]

Negative gearing has it's place, It should only ever be considered as a shorterm option though, just to get you started.

Hi Tysonboss1,

You're still missing my point,

Negative gearing is a joke because the taxpayer is funding your own get rich scheme, why should that be the case ?

 

[medicowallet]

Hi Tysonboss1,

You're still missing my point,

Negative gearing is a joke because the taxpayer is funding your own get rich scheme, why should that be the case ?

The taxpayer is not being affected much, if any.

If there wasn't negative gearing, the investor pays too much tax.

Directly by tax on the income received and indirectly by the taxation on bank profit / the flowthrough taxation from banking processes on the interest paid.

 

[basilio]

Property prices are crazy at the moment. There is just no way the majority of people could finance houses at 600k plus. And the last 3-4 interest rate rises are going to make that abundantly clear.

I suggest that what has happened is that for the last 6 months there has been some very keen overseas purchasers with plenty of money and no understanding of appropriate local house prices. They have jumped into the market and with probably only a few thousand sales have raised the prices by 15-20%.

So,perhaps naturally, many investors and even home owners have decided that if there are still buyers out there willing to pay these astronomical prices it's time to cash in. Hence the rush of property to market. There may also be a case for suggesting that some desperate home owners and some pushy banks/lending agencies are trying to get their money back from overextended borrowers. (it would be interesting to know how many upcoming auctions were forced sales - either overtly or covertly)

So what are the possibilities? If there are sufficient overseas buyers to create competition and keep prices up then the market will hold. On an ongoing basis however we would see an emerging problem with housing shortages and affordability because the higher cost of housing would simply be out of the reach of the majority of people. Just can't see how this would benefit anyone else except Real Estate agents and similar entities.

Many Real Estate agents are actively marketing our property in Asia. I suspect that the created bubble of the last 6 months may still be sufficient to entice enough buyers to keep this scam sorry - "investment opportunity" going a bit longer - maybe.. Again it will interesting to see if the Governments changes to the capacity of overseas purchasers to buy are meaningful or simply another insignificant hurdle for the Real Estate agents bent on greed and glory.

 

[Mofra]

Daily people in the financial industry (bankers in particular) have to put up with being labelled greedy capitalists with no moral purity etc, and quite often the ones criticising greedy financiers are the ones with numerous negatively geared property investments and are themselves as hypocritical and as greedy as anyone. Why doesn't the mainstream media get stuck into main street Australian greed?

Perhaps the "greedy bankers" as you put it are using the trust & capital of others, whilst your average property investor is adopting 100% of the risk themselves?

Apples and oranges argument.

 

[Mofra]

See the point of buying a property is that you are buying an inflation hedged income stream. This is the biggest point that gives property a huge advantage over a cash investment.

If you don't understand that your rental return and capital value of the investment will increase with inflation over time (through the ups and downs), but the value of your cash investment and the cashflow will not increase, then you don't understand property investment at all.

When I said it does not require any further capital from me I mean that the property is now self funding, the rent covers all costs including maintance, So it is providing an income stream net of costs.

It is worth mentioning at this point the effect inflation has on deflating the debt burden over time. A property matching the inflation rate geared at any significant amount performs over time simply because the inflation on asset, combined with the deflation on debt, accelerates the equity growth.

 

[Tysonboss1]

In order for it to perform you need at least 3.5% more (to match the risk-free investment) plus some more to cover the ongoing costs and justify the risk taken. The more part may come from CG, rent or both.

How much is worth it is a matter of personal choice.

2. What is the risk / reward ?

What is the capital at risk under various scenarios and what is the projected return (realistic scenarios required

3. Are there better investments ? (better is user-defined here)

Regards

Property is returning over 4%, so that is above your benchmark of 3.5%.

But as I continue to say, Property income rises with inflation, that AAA government bond income does not rise with inflation it is fixed.

The value of the property also increases with inflation, But again the government bond does not. When you subtract the inflation rate your AAA bond produces nothing and it is actually negative after tax so the property is producing much more.

Offcourse there are investments that produce a higher return than property, I am invested in the share market and businesses also. But owning some property gives the rest of your portfolio alot of stability.

I believe a portfolio with property, shares and businesses is best.

 

[Tysonboss1]

Hi Tysonboss1,

You're still missing my point,

Negative gearing is a joke because the taxpayer is funding your own get rich scheme, why should that be the case ?

No they aren't.

The goverment does not actually give you money, when I first bought my property I was earning about $1000 a week, and the property had a negative cashflow of about $50 / week, so I paid tax on $950 instead of $1000. Not really a big loss in tax revenue for the government, and that was just the first 3 years.

But I am providing homes that other wise would have to be provided by public housing. So for a loss in tax revenue of $15 / week (based on $50) for three years the government gets a house provided for 20 years. Now it would cost alot more than that for them to supply.

Also the Banks are paying tax on the interest they earn from the loan, which is more that $15 / week that i was deducting.

and now that it is positive cash flow I am paying tax of more than $15/ week for the last 7 years.

 

[skcots]

My example was BHP which is only 2.5% yeild not 5%.

Negative gearing has it's place, It should only ever be considered as a shorterm option though, just to get you started.

The property that I used in the example a few pages back, was negatively geared for the first three years but now provides a strong positive income stream.

Once you are over the hurdle of making your first property positive cashflow, you can use that extra cashflow to help bring another property into positive cashflow.

When I first read your example I did some calculations just to satisfy my curiosity over the property vs shares debate. I calculated what would of happened if you just bought a big blue chip with out a loan. I chose WOW shares.

I deleted my calculations but they went on the lines of this:
1.) 2001 you buy $37000 worth of shares (equiv of 30k deposit + 7k stamp duty)
2.) Over the next three years you annually buy WOW shares to the equivalent amount of the minimum payment on a $188,000 mortgage calculated at 7.5% interest over 30 years
3.) at the end of the each year you reinvest the dividend ignoring the franking credits.

The result was an income in 2010 (assume the second half dividend remains the same as the first half) of about $11000 + franking credits ($14000 pa). I cant remember the share value.

Considering there is no debt, no work and no ongoing costs this sounds like a win to me. BHP shares might not have produced the same result but I doubt anyone with a bit of common sense would put all their money into a single blue chip anyway.

I am not saying property is a bad investment but its not as great as its made out to be. Unless you are a person who is prepared to work or knows the market well.

 

[cutz]

The goverment does not actually give you money, when I first bought my property I was earning about $1000 a week, and the property had a negative cashflow of about $50 / week, so I paid tax on $950 instead of $1000. Not really a big loss in tax revenue for the government, and that was just the first 3 years.

Tysonboss1,

Your still missing the point,

You personal situation doesn't concern me, negative gearing is a joke because interest expenses from a get rich scheme can potentially wipe out all income from other sources.

I can't see why this should be allowed.

Someone mentioned that the money trail flows into banks which then gets taxed at their end but I still fail to see the point.

 

[Dowdy]

Never mentioned it was a bubble and 20% is only the last years growth and that is my point. Even if 20% was wiped off prices, it would essentially only effect those that bought in the last year. This is why it is such a good investment for those who got in pre GFC. If 20% can be added to prices so fast then why can it not be taken away just as fast.

As for people speculating on PPOR, ask young families if they would have both parents working to pay off a large mortgage if there was no chance of capital gains for the next five years. Answer, no. Australians have become the greatest speculators of property in the world, how else do you explain the massive growth in prices last year, fundamentals, ha. No the speculation of missing out, no getting on the property ladder, being priced out forever, rent is dead money etc etc etc.


Cheers

A 20% gain and a 20% loss doesn't mean you break even.

It's grade 5 maths.

100+20%=120

120-20%=96

You're down 4% on your original price.

 

[Tysonboss1]

When I first read your example I did some calculations just to satisfy my curiosity over the property vs shares debate. I calculated what would of happened if you just bought a big blue chip with out a loan. I chose WOW shares.

I deleted my calculations but they went on the lines of this:
1.) 2001 you buy $37000 worth of shares (equiv of 30k deposit + 7k stamp duty)
2.) Over the next three years you annually buy WOW shares to the equivalent amount of the minimum payment on a $188,000 mortgage calculated at 7.5% interest over 30 years
3.) at the end of the each year you reinvest the dividend ignoring the franking credits.

The result was an income in 2010 (assume the second half dividend remains the same as the first half) of about $11000 + franking credits ($14000 pa). I cant remember the share value.

Considering there is no debt, no work and no ongoing costs this sounds like a win to me. BHP shares might not have produced the same result but I doubt anyone with a bit of common sense would put all their money into a single blue chip anyway.

I am not saying property is a bad investment but its not as great as its made out to be. Unless you are a person who is prepared to work or knows the market well.

Big Flaw,

You failed to use the rent on the property in your calcs, but you used the dividend on the stock

I only added $50 per week out of my own pocket for the first threee years, Not the minimum payment on a $188,000 loan you calculated, because the rent covers the bulk of the paymnet

 

[Tysonboss1]

Tysonboss1,

interest expenses from a get rich scheme can potentially wipe out all income from other sources.

No it can't,

this is how it works,

Person works and earns $100,000 income from their job,

They also lease out a rental property for $50,000.

on their tax return they will now have $150,000 income, However like any business you don't pay tax on total revenue you pay tax on profit.

So they can then deduct the $55,000 costs involved which leaves them $95,000 taxable income.

For a person to deduct their entire $100,000 pay check they would have to be suffering massive losses and would probally be starving to death, It simply doesn't happen.

 

[sinner]

Never mentioned it was a bubble and 20% is only the last years growth and that is my point. Even if 20% was wiped off prices, it would essentially only effect those that bought in the last year. This is why it is such a good investment for those who got in pre GFC. If 20% can be added to prices so fast then why can it not be taken away just as fast.

The question is no longer, "what happens to those who bought at the top". (re: negative equity)

The question now is: what happens to the loan books of companies like CBA and WBC if property values decline even 6%?

This is a rock and a hard place. Either house prices return to historical affordable mean (3-5x avg annual income) or Australian standard of living decreases. We cannot have it both ways anymore.

Australian banks are so fully levered into real estate that even a small but sustained decline in price could completely wipe them out.

Why do you think house prices have been propped up to the extent they have? Certainly no other government in the world has gone to the effort and spent the money that ours has to support the domestic housing market. Let's not fool ourselves into thinking the government gives a crap about the first home owner or property investor. The interest groups here are: banks, property developers, REITs, etc.

 

[cutz]

on their tax return they will now have $150,000 income, However like any business you don't pay tax on total revenue you pay tax on profit.

I know exactly how it works but I don't think all property investors are so conservative.

If that were the case, why does government baulk at cutting negative gearing ?