The future of Australian property prices

[Tysonboss1]

but at the end of the day something is only worth what someone is willing to and able to pay for it. the perfect property everyone might LOVE and do anything for, but at $50mil a pop, no one will be able to afford.

they can afford it when I developer buys it and puts 200 Apartments on it.

Times change, 150 years ago parramatta was farm land using your formula land in parramatta would never be worth $5M a hectare because no farmer could produce enough cattle off that land to beable to pay that price.

But fast forward 150 years and you see a 5 level westfield shopping centre and 20 story apartment buildings and suddenly $5M a hectare seem cheap as chips.

 

[wayneL]

Tyson,

That's not a valid argument. You are talking land use and zoning changes. That inner city workers cottage is no longer a workers cottage, it's redeveloped by a totally different demographic. Everyone recognises this phenomenon and everyone tries to see far enough ahead to capitalize, if so inclined.

Inner city suburbs of a rabidly growing and prosperous city will have additional dynamics that will push prices much higher because of extraneous value factors as you detailed.

The affordability argument is about average family homes of more or less equal demographic.

 

[schnootle]

Thanks professor,

i just find it hard not to look at the progressions of the prices vs wages. even if demand is through the roof with great infrastructure, transport opportunities. . .bla bla bla, all the growth "factors", but at the end of the day something is only worth what someone is willing to and able to pay for it. the perfect property everyone might LOVE and do anything for, but at $50mil a pop, no one will be able to afford.

This is what I have always thought, simple maths says it is a matter of when not if prices stop growing relative to wages. But apparently housing in Australia is "different" (like pets.com)

 

[gordon_gecko]

Let me start by saying I agree that property (atleast the market I study) is properly due for some stagnation or possible down ward pressure. but who knows what will i happen short term, I certainly don't.

However, I don't fully agree with your idea that it is impossible for property to grow faster than the rate of inflation longterm.

Over time land uses and population densities change and this gives rise to price increases that are out of wack with with normal affordabilty calculations.

For example, what was considered an average family home in the 60's and was affordable to someone of average means may now sell for upwards of $2M and be way out of reach of someone of average means, Does this mean that the property in over valued and will some how fall in value to better reflect the rate of inflation. probally not.

The property could attain a $2M price tag because over the past 50 years density may been increasing and developers will buy this property and put 10 apartments on it and sell or rent the apartments to those of average means, or high income earners that don't want to live in apartments will bid up the prices of the areas that aren't being developed.

you can see examples of this all over sydney, I have seen a house sold in my suburb that was in an unlivable condition for $2.3M, along with the 2 houses either side it was turned into an apartment building, While on the other side of the suburb houses that aren't in the correct zoning to be developed still sell for over $2M because there are high income earners willing to pay that much not to live in an apartment but still live close to the city.

To be honest their Tyson, what your saying makes no sense what so ever im sorry to say. Its quite evident that wages rise with CPI (agreed. . . clearly), and the governments goal is to keep Inflation between 2-3% and they WILL do so in means of fiscal or monetary policy, that is a guarantee. Therefore this is highly unlikely to change. Its evident that the inflation does fluctuate above and below the governments goal, however this happens within all economic variables in the SHORT TERM- ie. unemployment, GDP vs potential GDP.

Your second argument stating that houses were just as affordable in the 60's and now are worth 2M is is not correct. Houses were much cheaper agreed, but that was not matched by a similar percentage change in the wage. People often say that houses were 1000 pounds but it still took people 30 years to pay off. Far from the truth, My parents bought a house in the fifties on average wages, and paid the house off in 5 years, not possible in todays climate even with strict extra principal payments.

The argument that your putting forward is the 60's house prices vs wages are relative to todays house prices vs wages. But mate what you have to realise is my compunding theory doesnt just work forwards it works backward too. Look on the RBA website and see historic data on CPI and inflation in the LONG TERM, short term fluctuations (wars, recession) are always corrected in teh long term.

 

[Beej]

To be honest their Tyson, what your saying makes no sense what so ever im sorry to say

[snip]

Gordon_Gecko - What Tysonboss wrote is 100% correct. It has nothing to do with how long it took an average wage earner to pay off their house in the 60s vs now. His point was that specific property and specific sub-markets can and do increase in value at a rate greater than inflation, and it is because the "exclusivity" if you like of a location/piece of land increases over time as population density increases and a city grows. In theory a market response to this to address affordability should be the provision of more housing in areas with lower land value, including the growth of smaller towns into future cities. This does eventually happen but is a macro/long term response.

The other thing you are forgetting is productivity growth. Since 1900 wages have compounded by a rate in excess of CPI consistently due to productivity improvements: The result being that a far smaller proportion of an average wage (which is actually $66k now by the way) is now needed for the basics of living (food/clothing/transport etc) today than in the past. Another way to say this is that DISPOSABLE income can and does grow at a rate in excess of inflation, and this is likely to continue to be the case. House prices are driven more by disposable household income than by the gross single wage.

Anyway we have actually been through many of these points on this forum many times before. Go back and read the "House prices to fall for years" and the "House prices to rise for years" threads, especially the first few pages, and you will see all these things and more discussed 2-3 years ago, then see who turned out to be right .

EDIT: Just to add more to my points above, here's a statement from the latest RP-Data house price release:

If we take overall disposable household incomes between end 2007 and end 2009, growth has been 11.5 per cent. In comparison, capital city house prices have risen by nine percent. Amazingly, the rest of state markets have grown by just 3.2 per cent between end 2007 and end 2009. On a per household basis, the disposable income growth over this period was about 7.6 per cent.

What this shows, is that the over-all national house price growth figures can mask some interesting trends. The above shows that right now, the big and high growth cities have house prices rising far more rapidly than in the regions. Affordability over time will cause a drift towards the more affordable centres, skewing median stats etc accordingly, but that won't stop values in the big and high growth cities from growing well in excess of inflation over the long term.

PS: In the short term, I have no doubt that are currently somewhere near a "top", which means an end to the big growth numbers seen last year. A minor correction may ensure, in the order of 5-10% IMO, but then things will steady in most cities and start to slowly grow again. Sydney may out-perform IMO, due to it already having seen a 20% correction in real terms between 2003 and 2008.

Cheers,

Beej

 

[Mofra]

Hey Guys first time writer long time reader,

I have an economic and law background and have been doing a bit of research into this particular area and have concrete views. I am not sure if this theory has been discussed but it is quite simple and impossible to argue against.

Anyone that understands economics knows that wages rise with CPI and inflation which is currently around 3% (2-3% target), which is restricting affordability.

However history shows that property prices are increasing by 7-10% p.a. and due to compounding this difference is magnified.

Sorry, had to pull you up on the bolded bit - AWOTE has been increasing faster than inflation for years, and I would expect that the property price growth (once the current period of property price consolitaion/stagnation is factored in) would come close to matching the average AWOTE rate for the first announcement next year.

 

[gordon_gecko]

Gordon_Gecko - What Tysonboss wrote is 100% correct. It has nothing to do with how long it took an average wage earner to pay off their house in the 60s vs now. His point was that specific property and specific sub-markets can and do increase in value at a rate greater than inflation, and it is because the "exclusivity" if you like of a location/piece of land increases over time as population density increases and a city grows. In theory a market response to this to address affordability should be the provision of more housing in areas with lower land value, including the growth of smaller towns into future cities. This does eventually happen but is a macro/long term response.

The other thing you are forgetting is productivity growth. Since 1900 wages have compounded by a rate in excess of CPI consistently due to productivity improvements: The result being that a far smaller proportion of an average wage (which is actually $66k now by the way) is now needed for the basics of living (food/clothing/transport etc) today than in the past. Another way to say this is that DISPOSABLE income can and does grow at a rate in excess of inflation, and this is likely to continue to be the case. House prices are driven more by disposable household income than by the gross single wage.

Anyway we have actually been through many of these points on this forum many times before. Go back and read the "House prices to fall for years" and the "House prices to rise for years" threads, especially the first few pages, and you will see all these things and more discussed 2-3 years ago, then see who turned out to be right .

EDIT: Just to add more to my points above, here's a statement from the latest RP-Data house price release:



What this shows, is that the over-all national house price growth figures can mask some interesting trends. The above shows that right now, the big and high growth cities have house prices rising far more rapidly than in the regions. Affordability over time will cause a drift towards the more affordable centres, skewing median stats etc accordingly, but that won't stop values in the big and high growth cities from growing well in excess of inflation over the long term.

PS: In the short term, I have no doubt that are currently somewhere near a "top", which means an end to the big growth numbers seen last year. A minor correction may ensure, in the order of 5-10% IMO, but then things will steady in most cities and start to slowly grow again. Sydney may out-perform IMO, due to it already having seen a 20% correction in real terms between 2003 and 2008.

Cheers,

Beej

I have to admit i do agree with your theory of the market response leading to development of smaller towns and growth in those regions, however i do no agree with your disposable income theory. Even if we reduce the HPI level by 5% per year (increasing affordability) and continue with current LPI growth(which btw is quite consistent with CPI over the past 100 years) it still does not offset the increase in house proces. It also does somewhat relate to the correlation between affordability now and 100 years ago. If we take into account productivity growth, (inconsistent and many economists believe that this will reduce in growth due to a reduction in global government investment) as well as LPI and house prices, the gap is clearly closing. The RBA has announced that house prices are the least affordable they have ever been and banks are feeling the pinch with first home buyers down 2.3% due to affordability.

You talk about 2-3 years ago and house prices are still flourishing and who is right, this issue is becoming increasingly volatile and it may not happen today, it may not happen tomorrow, but there will be a major correction within the next few years especially in capital cities, regardless of productivity and GDP growth.

Not only that, disposable income has a direct relationship with the consumer price index. As disposable income increases (due to productivity growth) so does DEMAND for goods and services. Therefore using the simple demand and supply law as demand increases, so does prices.

Cheers

 

[Tysonboss1]

Tyson,

Inner city suburbs of a rabidly growing and prosperous city will have additional dynamics that will push prices much higher because of extraneous value factors as you detailed.

The affordability argument is about average family homes of more or less equal demographic.

As a city like sydney grows and houses are demolished and replaced with apartments, The total number of "Family Homes" is decreasing while the number of people who would like to live in them is increasing So obviously the highest income earners will bid up the price to secure one for their family.

 

[Tysonboss1]

Your second argument stating that houses were just as affordable in the 60's and now are worth 2M is is not correct.

Thats not what I am saying,

What I am saying is that Houses in suburbs within 10k's of the city, were once affordable 3 bed family homes that were affordable on an average wage.

However with the density increases, those properties from the 60's have increased faster than inflation to the point where they are completed unaffordable on the average wage.

But that doesn't mean a person of average means can't live in that suburb.

Because as I said developers will knock down the house and put 10 apartments on it, and suddenly a $2M block of land is really affordable when the cost of the land is shared between 10 apartments that know sell for $390,000 each.

And the houses where the Zoning doesn't allow developers to build up will also grow invalue as people that refuse to live in apartments bid up the price to secure a family home.

To expect every one in sydney should be able to afford their own 1/4 block on the average wage is crazy, their is simple not enough land in sydney.

But feel free to move to a regional area.

Your arguement only works in a city that has no growth in population or density.

 

[gordon_gecko]

Thats not what I am saying,

What I am saying is that Houses in suburbs within 10k's of the city, were once affordable 3 bed family homes that were affordable on an average wage.

However with the density increases, those properties from the 60's have increased faster than inflation to the point where they are completed unaffordable on the average wage.

But that doesn't mean a person of average means can't live in that suburb.

Because as I said developers will knock down the house and put 10 apartments on it, and suddenly a $2M block of land is really affordable when the cost of the land is shared between 10 apartments that know sell for $390,000 each.

And the houses where the Zoning doesn't allow developers to build up will also grow invalue as people that refuse to live in apartments bid up the price to secure a family home.

To expect every one in sydney should be able to afford their own 1/4 block on the average wage is crazy, their is simple not enough land in sydney.

But feel free to move to a regional area.

Your arguement only works in a city that has no growth in population or density.

Ok, sorry i misunderstood your argument, but we have examples to portray that population growth does not affect affordability.

Look at thriving asian countries, population growth was so erratic that fiscal policy was put in place to reduce the number of children being born. Whats happening with the house prices there? They are so unaffordable that even the wealth are only able to afford with extreme loan terms, 100 year terms as 30 year terms are simple not affordable for the households there. I understand that their GDP per person is not as high as it is in western countries, but it does not reflect the housing situation.

Also density and popluation growth, resulting in increasing housing prices has to be supplied with an ever growing industrial market to facilitate this growth. I know this may be possible in Sydney, but Adelaide will never be able to facilitate this growth. Apartments have grown just as fast over the past 50 years as housing and units, so why wouldnt it continue. House prices soar to 25 million for a standard home and you think developers will buy the land and sell each individual apartment for even 1 million. Not likely when the current correlation is that apartments are on par if not more expensive than the average house price.

Cheers

 

[Tysonboss1]

Not likely when the current correlation is that apartments are on par if not more expensive than the average house price.

Cheers

Well I have no idea about adelaide, But the figures in my suburb of sydney are similar to the ones I used in the example,

Houses in my suburb are generally over $2M and apartments in the same suburb start at around $390,000.

Offcourse just like houses, apartment prices vary with quality and location,

You can't compare a penthouse apartment with veiws of the harbour bridge with a two bedroon ex housing commision home in the a$$ end of the western suburbs, and say I told you apartments are just as expensive as houses.

But my description of housing density growth is happening all over sydney,

 

[Tysonboss1]

House prices soar to 25 million for a standard home and you think developers will buy the land and sell each individual apartment for even 1 million. Not likely when the current correlation is that apartments are on par if not more expensive than the average house price.

Cheers

That has happened if you look at the price of land in sydney cbd, land can be $50M so the developer puts a 40 story building on it,

 

[gordon_gecko]

Well I have no idea about adelaide, But the figures in my suburb of sydney are similar to the ones I used in the example,

Houses in my suburb are generally over $2M and apartments in the same suburb start at around $390,000.

Offcourse just like houses, apartment prices vary with quality and location,

You can't compare a penthouse apartment with veiws of the harbour bridge with a two bedroon ex housing commision home in the a$$ end of the western suburbs, and say I told you apartments are just as expensive as houses.

But my description of housing density growth is happening all over sydney,

So your telling me that a property in Sydney is worth 2M when an apartment with similar attributes and similar quality is worth 390K, tell me where to sign bud

 

[UBIQUITOUS]

So your telling me that a property in Sydney is worth 2M when an apartment with similar attributes and similar quality is worth 390K, tell me where to sign bud

Plenty of North shore/Northern suburbs like this. Houses are ridiculously priced.

 

[Beej]

So your telling me that a property in Sydney is worth 2M when an apartment with similar attributes and similar quality is worth 390K, tell me where to sign bud

The house will come with probably 1000m2 of prime, torrens titled land and a nice big house. The apartment will be a 1 bedder of 60-70m2. For $500k you can probably get a nice big 2 or even 3 bed apartment of 80-100m2. Good value really, but people will still happily pay $2M for the house/land. The example given is very realistic for Sydney.

Tysonboss - sounds like you are on the north shore somewhere??

Cheers,

Beej

 

[Tysonboss1]

So your telling me that a property in Sydney is worth 2M when an apartment with similar attributes and similar quality is worth 390K, tell me where to sign bud

To give a real world example,

A house that is in a suburb 10kms from the sydney CBD, that had every window broken, the roof was falling in and 1/4 of the roof tiles were on the floor, the grass (actually they were weeds) was about 1M high, and vandals had spray painted all over it, Sold for the Bargain basement Price of $2.3M.

At the same time apartments were selling in a new development for $390,000.

That house that sold for $2.3 now as I said in an earlier post has apartments on it, it was bulldozed within 3 months of a developer buying it.

Obviously $2.3M was considered a fair price buy the developer for the land alone, if it had a better house on it it could have sold for more

 

[Tysonboss1]

Tysonboss - sounds like you are on the north shore somewhere??

Cheers,

Beej

Yes, you got me.

 

[Tysonboss1]

Plenty of North shore/Northern suburbs like this. Houses are ridiculously priced.

but they are expensive for a reason,

it's close to the city, close to good schools, beaches, low crime rate, good rail transport.

People on high incomes (company execs) would much rather spend >$2M and have all the above than save a measly $1.5 and subject their families to what the consider a lower standard of living in the crime filled western suburbs.

Any one with a house near a train line has been crying though in recent years as the north shore is seeing mass development along the train line as these Million dollar homes are being bulldozed to make way for Apartments, Which in turn is putting more upward pressure on the prices of houses away from the development which is mainly focused along the train line out to hornsby.

 

[sptrawler]

There is one thing for sure when everybody is saying this is going to last for ever and it is different this time. It is time to watch out, consumer spending is dropping like a rock and the RBA are going to push it, or maybe the banks will drop their bundle and tighten lending. Maybe something will come out of the blue and everyone say S#!+ I never saw that, but one thing is for sure nothing is forever.

 

[Tysonboss1]

There is one thing for sure when everybody is saying this is going to last for ever and it is different this time. It is time to watch out, consumer spending is dropping like a rock and the RBA are going to push it, or maybe the banks will drop their bundle and tighten lending. Maybe something will come out of the blue and everyone say S#!+ I never saw that, but one thing is for sure nothing is forever.

Who is saying that it is going to last forever and it is different this time.

I haven't heard any one say that here.