The future of Australian property prices

[schnootle]

I would love to see this thread resurrected in 10 years, reading some of these posts with the benefit of hindsight could be good fun. Quite a few people will be very wrong either way.

 

[Beej]

I would love to see this thread resurrected in 10 years, reading some of these posts with the benefit of hindsight could be good fun. Quite a few people will be very wrong either way.

There is an ASF property thread that is at least 5 years old already (see here; https://www.aussiestockforums.com/forums/showthread.php?t=1977&highlight=stagnate. Have a read of that thread if you want some good laughs!

There are also two other closed threads (Property prices to rise for years and Property prices to fall for years) that are about 2 1/2 years old now - also both good reads!

Cheers,

Beej

 

[drsmith]

Economic history tells us that the bursting of bubbles is typically sudden, spectacular and uexpected by the vast majority. The latter is obvious as punters would allready have their money invested elsewhere if they saw it coming.

 

[Bill M]

There is an ASF property thread that is at least 5 years old already (see here; https://www.aussiestockforums.com/forums/showthread.php?t=1977&highlight=stagnate. Have a read of that thread if you want some good laughs!

Thanks beej, I had a bit of a read of that thread. Here is what an ASF member had to say back in 2005: (post 2 from that link)

So why bother buying into a flat housing market?

The boom is over!

Thank bloody god!

Time to save for those house deposits and sit back for the next 4-5 years then enter the market.

Now wasn't that person so wrong. The median Sydney house price was $500,000 back then, now that person must pay $600,000 for the same house. It's the same old story year after year, it's too dear, I'll wait but as time goes on prices only go up. Chart attached for the non believers.

Source at this link.

 

[medicowallet]

hello,

good evening all, gee looks as though a lot gone away for the weekend

OH YEAH:

http://www.reiv.com.au/home/inside.asp?ID=162&nav1=1226&nav2=162

top effort, what a rebound

thankyou
professor robots

Yeah, great rebound!

Would have expected for it to stay lower. However on low volumes.

Hopefully it stabilises over the next few months. I can see a couple more interest rate rises with the good economic data, and after we get a new prime minister (don't know whether it will be labor or liberal though )

 

[UBIQUITOUS]

Even Residex seem to have given up talking up the market. Game over for those who bought in recently. I think the only people left talking up the property market must be a few stragglers on online forums who believe that denial will help their cause

http://www.theage.com.au/business/p...-for-a-home-starts-to-slow-20100612-y4ni.html

Balloon deflates as race for a home starts to slow
CHRIS VEDELAGO
June 13, 2010
MELBOURNE'S property boom appears to be over as buyer demand softens in the face of interest rate rises and soaring house prices.

The slowdown began last month as interest rates rose for the sixth time in less than a year and a flood of properties were put on the market by sellers hoping to capitalise on soaring prices.

 

[SM Junkie]

Hello,

If you believe property is the way to go, acquire your investment properties and shut up.
If you believe there is a housing bubble waiting to go bang, sell up, or hold off purchasing (oh, and shut up)

Why anyone bothers to influence complete strangers online is beyond me.

Come to your own conclusion, and do what you think is best for you.

Regards, me.

...and forums would go out of business. Come on people love to argue and this thread is a classic for it and always keeps me entertained. Be honest you love it, otherwise you would not be here??

 

[singlefished]

Thanks beej, I had a bit of a read of that thread. Here is what an ASF member had to say back in 2005: (post 2 from that link)


Now wasn't that person so wrong. The median Sydney house price was $500,000 back then, now that person must pay $600,000 for the same house. It's the same old story year after year, it's too dear, I'll wait but as time goes on prices only go up. Chart attached for the non believers.

Source at this link.

A fantasticaly skewed misrepresentation of the figures there Bill M.

The ironic thing is that the guy wasn't really that far off the money..... definately more right than wrong!

Your example of a $500K median Sydney property has only really grown at rate of about 3.65% P.A. to rise to its present $600K median. Probably about the same as inflation unless you subscribe to the 10% theory....

EXAMPLE 1 - based on many assumtions
In the last 5 years a 10% ($50K) deposit would have grown to a whopping $140K deposit if they continued thier saving strategy of say $1000 per month in a savings account returning 6.5%.

Thier present day mortgage of $460K would no doubt be a lot easier to service on their present day salary when compared the the previous $450K mortgage on thier salary 5 years ago....

EXAMPLE 2 - again, based on assumtions
If they had enough money to buy outright 5 years ago then growth (as above) equates to only 3.65% P.A.

If the $500K was placed in a 5 year term deposit at 6.5% then it would have grown to just over $691K.


So, without starting a debate on holding costs, tax liability on interest, opportunity costs, my own assumptions, etc, etc, etc, your stagnant 3.65% growth rate doesn't really rate a mention when you use the Sydney market as an example...

Just needed to point this out to anybody reading this 10 years from now

 

[Bill M]

So, without starting a debate on holding costs, tax liability on interest, opportunity costs, my own assumptions, etc, etc, etc, your stagnant 3.65% growth rate doesn't really rate a mention when you use the Sydney market as an example...

Just needed to point this out to anybody reading this 10 years from now

You have conveniently missed out one crucial calculation, what about the rent? Or assuming he did pay cash and lived in it, he lived at market price rent free.

For a 500k property it is easily achievable to get $500 p/w rent, probably more but lets use the lower end as the assumption.

Rent for 2005 to 2006 at $500 p/w = $26,000
Rent for 2006 to 2007 at $520 p/w = $27,040
Rent for 2007 to 2008 at $540 p/w = $28,080
Rent for 2008 to 2009 at $560 p/w = $29,120
Rent for 2009 to 2010 at $580 p/w = $30,160

Total rent for the 5 years is $140,400

So in fact not only did his property go up a 100k he received $140,400 in rent as well.

Total return is more like 48% for 5 years or about 8.2% annualised.
*Note* That is a gross return, taxes and fees have not been deducted and would depend on your personal circumstances.

To me a return of 240k for my 500k invested is not that bad. It keeps pace with inflation and really it is quite a passive investment.

 

[kincella]

Morning all.
love the media headline below, but if you actually read it, it states its the investors that are the interested parties, or disgruntled stock investors looking for the alternative....
seems its the transfer of money from the poor to the wealthy again......
the weak investors selling out......into the hands of the astute investors...

http://www.heraldsun.com.au/news/se...victorian-market/story-e6frf7jo-1225879171288

ps been having fun in Melb this weekend, and another spending spree at all the end of year sales, then off to the country for some R &R till the end of the month
it cannot get much better than this

 

[explod]

it cannot get much better than this

Yeheyeer good point , and it probably wont.

Nice that you are partying too by the way, life's short and the poor mugs sold down the tubes by the spruikers.

Great social responsibility and care for our fellows.

 

[Beej]

You have conveniently missed out one crucial calculation, what about the rent? Or assuming he did pay cash and lived in it, he lived at market price rent free.

For a 500k property it is easily achievable to get $500 p/w rent, probably more but lets use the lower end as the assumption.

Rent for 2005 to 2006 at $500 p/w = $26,000
Rent for 2006 to 2007 at $520 p/w = $27,040
Rent for 2007 to 2008 at $540 p/w = $28,080
Rent for 2008 to 2009 at $560 p/w = $29,120
Rent for 2009 to 2010 at $580 p/w = $30,160

Total rent for the 5 years is $140,400

So in fact not only did his property go up a 100k he received $140,400 in rent as well.

Total return is more like 48% for 5 years or about 8.2% annualised.
*Note* That is a gross return, taxes and fees have not been deducted and would depend on your personal circumstances.

To me a return of 240k for my 500k invested is not that bad. It keeps pace with inflation and really it is quite a passive investment.

Excellent point! They always forget about rent otherwise being paid, being received or NOT being paid in the case of an OO The other thing not accounted for is the additional mortgage principle that can be paid down in lieu of saving the "$k/month" for the renting case.

Additionally, if you DO account for taxation in the calcs (as you should) then the owning scenario comes out way ahead even more due to the fact that capital gains are tax free for OOs, or only half marginal rate for an investor (worse case), plus rent not paid for OO is an after tax saving. Compare that to paying the full marginal rate on a term deposit - someone on the 38% tax bracket would only be receiving < 4%pa after tax total return on their cash.

I've actually got a fairly detailed spreadsheet that models this type of comparison calculation properly, accounting for ALL costs/factors/tax etc for the rent vs OO case. Here's how this scenario pans out.

Inputs:

* House purchased for $500k 5 years ago, no stamp duty paid (FHB exemption in NSW), plus $7k FHBG, with a $50k deposit
* House appreciates at 3%pa giving a value of $600k after 5 years
* Essential maintenance on house = 0.5% (~$2.5k) average/year
* Rental cost for equivalent property = 4.5% of value
* Mortgage interest rate = 7%
* Term deposit rate = 6.5%pa before tax
* Marginal tax rate = 38% + 1.5% medicare levy
* Disposable income (income after tax, living expenses etc but before rent/mortgage payments) = $35k/year (equals enough to save about $1k/month when renting in this scenario)
* Income and other costs increase at CPI = 3%

Outcome after 5 years (note I've rounded some numbers to the nearest $1k for simplicity):

* Both have earned a total of $186k disposable income over the 5 year period

* Owners equity = $164k
* Owner has $438k left on mortgage, house worth $600k
* Total $ paid in interest = $155k
* Total $ paid in rates/insurance/maintenance = $26k
* Principle paid off mortgage = $5k

* Renter has $127k cash in the bank (Started with $50k, added $61k in additional savings, earned $15.6k in after tax interest earnings)
* Total rent paid = $121k, + $3.5k spent on having to move a couple of times over the period.


Conclusion: Owner ahead by $37k

The longer you model this, even with very moderate house price appreciate, the better off the OO get's, as their interest bill reduces every year, their house appreciates over the long term, while the renters rent increases every year over time, and tax ravages their savings returns.

PS: The exact same scenario where we start with the $500k cash up front for outright purchase, results in the OO being ahead by a whopping $105k after the 5 years!!!

Bill was right, that poster from 5 years ago was WAAAAAY off the mark I'm afraid.

Cheers,

Beej

 

[Beej]

Quick PPS: House appreciation rate above used was 3.7%, not 3%, to give a final value of $600k.

 

[UBIQUITOUS]

http://www.news.com.au/money/proper...ce-rates-fall/comments-e6frfmd0-1225879274233

Victoria sees record number of homes up for auction as clearance rates fall
By staff writers June 14, 2010 7:08am 116 comments

REAL estate auction clearance rates plummeted to a 52-week low in Melbourne on Saturday, with the dramatic slide attributed to rising interest rates, changes to the foreign investment rules and the downturn for the long weekend.

Of the 135 reported auctions in Victoria's capital city, just 59 sold under the hammer, while there was a total clearance rate of 59.9 per cent.

GAME OVER

 

[satanoperca]

TOTAL AUCTIONS REIV

This week: 268
Last weekend: 908
This time last year: 527

S Sold at Auction: 139
SB Sold before Auction: 63
SA Sold after Auction: 5

Passed in: 61
Passed in on vendor's bid: 31

Clearance rate: 77%


Postponed: 1
Withdrawn: 1
Auctions with no result: 72

One must assume that they were not recorded as there was no sale. If 50% of the no results we included in the clearance rate as no sale, the clearance rate goes down to 68% and if all of them we included as no sale then it is further reduced to 60%.

Cheers

 

[robots]

hello,

good evening everyone, great Queens birthday holdiday

fabulous discussion today

can we please have a show of hands as to who believes auction clearance rates are relevant to the market, rba or anyone else?

great to see Melbourne at the top of the table again (property council), the place to be brothers

thankyou
professor robots

 

[singlefished]

You have conveniently missed out one crucial calculation, what about the rent?

Funny, I personally would assume that most people saving a deposit to buy a property are NOT cashed up investors... as you are well aware, investors use equity from existing holdings! This guy did discuss saving for a deposit before entering the market....

Total rent for the 5 years is $140,400

Total mortgage repayments for 5 years = $190,800 + holding costs (even more if you didn't provide 10% up front)

Ooooops! Conveniently forgot about paying your debts didn't you.... and if you sold after the 5 years you'd be up for CGT.

Excellent point! They always forget about rent otherwise being paid, being received or NOT being paid in the case of an OO The other thing not accounted for is the additional mortgage principle that can be paid down in lieu of saving the "$k/month" for the renting case.

See above.....

Additionally, if you DO account for taxation in the calcs (as you should) then the owning scenario comes out way ahead even more due to the fact that capital gains are tax free for OOs, or only half marginal rate for an investor (worse case), plus rent not paid for OO is an after tax saving. Compare that to paying the full marginal rate on a term deposit - someone on the 38% tax bracket would only be receiving < 4%pa after tax total return on their cash.

I've actually got a fairly detailed spreadsheet that models this type of comparison calculation properly, accounting for ALL costs/factors/tax etc for the rent vs OO case. Here's how this scenario pans out.

Inputs:

* House purchased for $500k 5 years ago, no stamp duty paid (FHB exemption in NSW), plus $7k FHBG, with a $50k deposit
* House appreciates at 3%pa giving a value of $600k after 5 years
* Essential maintenance on house = 0.5% (~$2.5k) average/year
* Rental cost for equivalent property = 4.5% of value
* Mortgage interest rate = 7%
* Term deposit rate = 6.5%pa before tax
* Marginal tax rate = 38% + 1.5% medicare levy
* Disposable income (income after tax, living expenses etc but before rent/mortgage payments) = $35k/year (equals enough to save about $1k/month when renting in this scenario)
* Income and other costs increase at CPI = 3%

Outcome after 5 years (note I've rounded some numbers to the nearest $1k for simplicity):

* Both have earned a total of $186k disposable income over the 5 year period

* Owners equity = $164k
* Owner has $438k left on mortgage, house worth $600k
* Total $ paid in interest = $155k
* Total $ paid in rates/insurance/maintenance = $26k
* Principle paid off mortgage = $5k

* Renter has $127k cash in the bank (Started with $50k, added $61k in additional savings, earned $15.6k in after tax interest earnings)
* Total rent paid = $121k, + $3.5k spent on having to move a couple of times over the period.


Conclusion: Owner ahead by $37k

The longer you model this, even with very moderate house price appreciate, the better off the OO get's, as their interest bill reduces every year, their house appreciates over the long term, while the renters rent increases every year over time, and tax ravages their savings returns.

PS: The exact same scenario where we start with the $500k cash up front for outright purchase, results in the OO being ahead by a whopping $105k after the 5 years!!!

Bill was right, that poster from 5 years ago was WAAAAAY off the mark I'm afraid.

Cheers,

Beej

You've been very generous with your rental assumptions and haven't compensated the savings to provide for the same monthly outlay of servicing a $450K mortgage allowing for a direct comparison.

* Repayments on a 450K morgtgage is $3180
* 4.5% return on $500K = $1875 PCM rent
* Renters savings $1000 per month

A renter paying $1875 rent and saving $1000 couldn't afford the $450K mortgage monthly repayments of $3180 + holding costs....

Try using real rental medians instead from Housing NSW.

Housing NSW figures for Sydney back in June 2005 provide median rent of $260 PW rising to $380 PW March 2010 (middle ring, 2 bedrooms). Assume $320 average over 5 years.

Equivalent savings now corrected to $1793 (approx) over the same 5 year period (mortgage repayment $3180 PCM minus the average $1387 PCM rental of $320 PW 5 year average)

5 years owner has equity of $164K (your figures)

5 year renter has grown his $50K deposit to $180K after tax (generously assume owner-occupier costs = renters moving costs of $2500 per year) if outgoings are equal between the 2 parties

Conclusion - renter wins....​

5 year owner with house paid 100% deposit and same disposible income saves $3180 PCM After tax savings = $211K + $100K appreciation = $311K

5 year renter saves $1793 per month after rent payments totalling $732K after tax savings.

Conclusion - owner wins​

So, I was wrong on the second scenario with tax being considered.... but that's beside the point since I haven't heard of too many home buyers with 100% deposit!

Conclusion, the original poster from 5 years was right on the money and I state again, Bill is wrong.

In summary, the 5 year renter hasn't missed the boat by waiting for 5 years since he has now saved up a much bigger deposit combined with smaller mortgage repayments if he decides to jump in now!

The mortgage would now only be for $420K providing additional capacity to save or pay at a rate equivalent to a $450K mortgage....

Cheers....

PS:

 

[Beej]

You've been very generous with your rental assumptions and haven't compensated the savings to provide for the same monthly outlay of servicing a $450K mortgage allowing for a direct comparison.

* Repayments on a 450K morgtgage is $3180
* 4.5% return on $500K = $1875 PCM rent
* Renters savings $1000 per month

A renter paying $1875 rent and saving $1000 couldn't afford the $450K mortgage monthly repayments of $3180 + holding costs....

Not correct - I have used the EXACT same income in both scenarios. The income level required by the renter to save $1k/month is enough to cover the interest on the $443k mortgage (because they got the $7k grant remember), and some principle, so therefore good enough for an apples to apples comparison. Interest @ 7% (average rate over the 5 years is probably actually less than this but anyway) = $2584/month, so your $1875k + $1k IS in fact enough to cover that interest and some principle. Completely valid figures to use for comparative purposes. We could even have used interest only if we want to keep it very simple! The result is about the same for the interest only loan by the way (renter closes gap by about $2.5k only).

If I up the income level so there is enough to cover your calculated mortgage payment + other costs (which is $40k pa disposable by the way), then the renter equivalent savings lift to an average of about $1.4k/month. Fine - in this scenario by my calcs the OO comes out even further ahead due to the reducing interest from more loan principle being paid off than in the original scenario.

Try using real rental medians instead from Housing NSW.

Housing NSW figures for Sydney back in June 2005 provide median rent of $260 PW rising to $380 PW March 2010 (middle ring, 2 bedrooms). Assume $320 average over 5 years.

Equivalent savings now corrected to $1793 (approx) over the same 5 year period (mortgage repayment $3180 PCM minus the average $1387 PCM rental of $320 PW 5 year average)

Totally unrealistic. Median rental property is NOT equivalent to the median Sydney house. For a start, median rents include units, which constitute the bulk of rental properties in Sydney, median house price does not include units. As we are using a median house price figures here, we need to use rent for something more than a middle ring 2 bed flat!! 4.5% is a very realistic rental return for median priced property in Sydney over the past 5 years. I think your rental figures are from fantasy land!

5 years owner has equity of $164K (your figures)

5 year renter has grown his $50K deposit to $180K after tax (generously assume owner-occupier costs = renters moving costs of $2500 per year) if outgoings are equal between the 2 parties

Conclusion - renter wins....​

That calculation is wrong. You have not increased the home owners equity at the end of the period due to the higher mortgage payment you have now assumed as being required ($3180/month). So paying that much results in the OO equity at the end of the 5 years increasing to $192k.

Then, even using your incredibly generous and totally unrealistic rental assumptions, (which equates to a 3.33% rental return), the OO was still $12k ahead. Of course using realistic/equivalent rents they were $37k ahead as I originally demonstrated.

5 year owner with house paid 100% deposit and same disposible income saves $3180 PCM After tax savings = $211K + $100K appreciation = $311K

5 year renter saves $1793 per month after rent payments totalling $732K after tax savings.

Conclusion - owner wins​

So, I was wrong on the second scenario with tax being considered.... but that's beside the point since I haven't heard of too many home buyers with 100% deposit!

Conclusion, the original poster from 5 years was right on the money and I state again, Bill is wrong.

At least you acknowledge you were wrong on that front. I notice you don't say by how much though! Even by your calcs the owner is in front by $80k!

In summary, the 5 year renter hasn't missed the boat by waiting for 5 years since he has now saved up a much bigger deposit combined with smaller mortgage repayments if he decides to jump in now!

Not correct, even with your incredibly cheap rental cost assumptions the OO is ahead by $12k. Realistic rents take that figure to $37k. Either way the OO was in front. The bigger the deposit the more ahead the OO is, and the more time that passes the further in front they would get.

Final question - how do you think this calculation would pan out for Melbourne?????

Cheers,

Beej

 

[Scalper23]

Every bubble in history has always ended in a crash. This property market will be no different. Trees don't grow to the sky. Every debt fueled rally always ends in a crisis. You cannot continually value property prices by similar sales in the same area in a bull market.

 

[singlefished]

Not correct - I have used the EXACT same income in both scenarios. The income level required by the renter to save $1k/month is enough to cover the interest on the $443k mortgage (because they got the $7k grant remember), and some principle, so therefore good enough for an apples to apples comparison. Interest @ 7% (average rate over the 5 years is probably actually less than this but anyway) = $2584/month, so your $1875k + $1k IS in fact enough to cover that interest and some principle. Completely valid figures to use for comparative purposes. We could even have used interest only if we want to keep it very simple! The result is about the same for the interest only loan by the way (renter closes gap by about $2.5k only).

Twisted to suit your argument.... why don't you compare apples with apples (outgoings to outgoings, P&I to Rent+Savings) instead of apples to oranges (Interest only to Rent+Savings).

I could have gone down the road of piling his savings into the share market for 5 years but I didn't.... better to keep the analysis unsophisticated and assume simple typical scenarios like P&I mortgage repayments.

Please recalculate with typical repayments for P&I, not the investor style interest only.

I didn't really worry about the 7K FHB grant in my analysis.... why does it have to be a FHB? It doesn't make that much difference to the outcome, $50 PM on their P&I repayments...

If I up the income level so there is enough to cover your calculated mortgage payment + other costs (which is $40k pa disposable by the way), then the renter equivalent savings lift to an average of about $1.4k/month. Fine - in this scenario by my calcs the OO comes out even further ahead due to the reducing interest from more loan principle being come paid off than in the original scenario.

This is where you assume that the renter is currently renting the property they want to buy. Most people don't even consider the potential rental returns when contemplating the purchase of a PPOR. If they are saving up to buy then they are more than likely living in cheaper rental accommodation or still at home with mum and dad.

All renters (and former renters) I've ever known manage to minimise thier outgoings (rent) to maximise thier savings (deposit), that's how it works, simple as that. It's a little bit too brave to assume otherwise... but please correct me if I'm wrong.

Outgoings such as cost of living, lifestyle, etc cancel each other out as they are common to both scenarios so no need for either of us to back calculate desirable income levels to bolster your point.

Totally unrealistic. Median rental property is NOT equivalent to the median Sydney house. For a start, median rents include units, which constitute the bulk of rental properties in Sydney, median house price does not include units. As we are using a median house price figures here, we need to use rent for something more than a middle ring 2 bed flat!! 4.5% is a very realistic rental return for median priced property in Sydney over the past 5 years. I think your rental figures are from fantasy land!

Well, you can waste time and argue with housing NSW, I'm not taking it all that seriously...

Rent tables June Quarter (Excel, 240Kb) from here:
http://www.housing.nsw.gov.au/About+Us/Reports+Plans+and+Papers/Rent+and+Sales+Reports/Back+Issues/2005/June.htm

I've used $260 which is all dwellings..... $263 if you only want to assume they are renting in a house, $255 if it's a unit.

It's not fantasy land, It's Sydney

That calculation is wrong. You have not increased the home owners equity at the end of the period due to the higher mortgage payment you have now assumed as being required ($3180/month). So paying that much results in the OO equity at the end of the 5 years increasing to $192k.!

I'd actually calculated their equity to be $189,770.31 with an initial mortgage of $450K. Please don't lambast me for quoting your own figures back at you.... I really couldn't find the orifice you pulled the $164K from so assumed I was making a mistake because you have some sooper-dooper all encompasing spreadsheet. Silly me for failing to realise you were adopting a typical investor style interest only loan in a discussion about an owner occupied situation.... I'll know better next time eh

Then, even using your incredibly generous and totally unrealistic rental assumptions, (which equates to a 3.33% rental return), the OO was still $12k ahead. Of course using realistic/equivalent rents they were $37k ahead as I originally demonstrated.

As outlined above, why would they burn big money on renting instead of saving it? The rents quoted probably DO return 4.5% but on lower value rental stock....

At least you acknowledge you were wrong on that front. I notice you don't say by how much though! Even by your calcs the owner is in front by $80k!

I honestly thought you were smart enough to do your own simple arithmetic. I was right!!!

Not correct, even with your incredibly cheap rental cost assumptions the OO is ahead by $12k. Realistic rents take that figure to $37k. Either way the OO was in front. The bigger the deposit the more ahead the OO is, and the more time that passes the further in front they would get.

^^^^^^ LOOK UP ^^^^^^

Final question - how do you think this calculation would pan out for Melbourne?????

Different story for Melbourne but I wanted to keep it on topic and address the statements and timeframe presented.

Final question for you.... obviously you have assumed a FHB since you capture the 7K grant. Please tell me why you assume they are renting prior to buying instead of staying at home until 30yrs old and bludging of mum and dad which is now reported as the norm

In this situation $272K savings after tax sort of makes it an even better discussion

Cheers.....