The future of Australian property prices

[qldfrog]

Beej,
am I missing it or did you also forgot to add council rates to the figure?
If similar to qld, for such a property you will easily pay 2k/year as an owner vs included in rent as a renter?
In any case, in my opinion (only) the bubble is popping and I just have to wait a 15 to 20% discount before entering the RE for investment (here in Brisbane): either as price fall or after 3 years due to inflation vs flat RE price; time will tell
But I am sure Robot will see it very differently ;-)

I do appreciate the debate and the will to put some figures

 

[Beej]

Beej,
am I missing it or did you also forgot to add council rates to the figure?
If similar to qld, for such a property you will easily pay 2k/year as an owner vs included in rent as a renter?

Rates are included in my calculatins for the oo, as is insurance and maintenance.

 

[schnootle]

You cannot continually value property prices by similar sales in the same area in a bull market.

Well put, at some point the music stops. Reminds me of George Bush's famous "Nothing will stand in the way of the American way of life", yeah tell that to nature.

 

[Beej]

Twisted to suit your argument....

Umm - pot, kettle, black....

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).

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

Please re-read my post and analysis. I DID NOT use interest only calculations, and my comparison was a true "apples to apples" one. I simply started with the figures that YOU originally used, which resulted in the renter saving $1k/month. I simply worked backwards from your numbers and created a scenario where the income spent on rent + savings was exactly the same as the income used by the OO to service the mortgage and pay holding costs.

Additionally, as I pointed out, there would be no point in me using interest only as that is actually the most favourable outcome for the renting scenario, although the OO still comes out in front. I then went on to use your new numbers anyway and the outcome is even more in favour of the OO, so not sure what you are really arguing here anymore?

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...

Well $7k is $7k - it's a fair chunk of change and worth taking into consideration I think.

This is where you assume that the renter is currently renting the property they want to buy.

So now after going on about apples-apples comparisons, you want to change the comparison (which you originally brought up) to apples to oranges??

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.

Again, please re-read my analysis. There is no "point bolstering" going on, we are in violent agreement on this point and have both made this assumption! All I do is work out how much income you need to have "left over" to pay the rent + savings or the mortgage + holding costs in each scenario and ensure I use the EXACT same figure for both.

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

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

You are completely ignoring my point regarding the difference between a median rental property and a median house. Yours is not an apples to apples to apples comparison. Anyone who lives in Sydney knows that you cannot rent any dwelling that today is worth $600k for less than $500/week today. 5 years ago maybe you got that house for $400/week.

Regardless, as both I, and yourself have now shown, even using your low rents for comparison the OO comes out in front.

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....

OK so I'll lambast you for being dis-ingenious and mis-representing your OWN calculations, which in fact showed that the OO was in front!!

My $164k OO equity figure, as I clearly explained, came from using YOUR initial comparison income level of rent + $1k/month savings. Clearly, if you increase the renters savings/OOs mortgage payments to a higher level, then the OO will pay off MORE of their mortgage principle than in the first scenario! And you have the hide to make snide remarks about my intelligence and maths skills!

So now with your last post an astute reader will realise that you have actually proven both your previous conclusions to be wrong. In both the $50k deposit scenario, and the 100% purchase scenario, the OO ends up in front!

In the $50k deposit case, by at least $10k (using your fantasy rents and your own OO equity calc ignoring FHBG) and more likely $37k using realistic/comparative rents etc, and in the 100% purchase case by between $80k (your calcs) and $100k.

Thankyou.

Cheers,

Beej

 

[medicowallet]

hello,

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

thankyou
professor robots

I don't think so on a couple of levels.

1. They are often manipulated
2. Agents tend to auction houses that will sell
3. Clearance rates maintain when people are forced to sell at lower prices
4. Clearance rates maintain when there is a bull market.

and many more I don't have the want to list.

It is just too difficult for me in my office to know which of many variables is influencing the clearance rate.

I think growth in debt is a better indicator, as we all know that house price growth is driven by debt.

 

[singlefished]

Please re-read my post and analysis. I DID NOT use interest only calculations

Well, you have quoted repayments of $2584/month on a $443K mortgage and almost unbelievably, every online mortgage calculator for interest only repayments comes up with the same figure....

I simply started with the figures that YOU originally used, which resulted in the renter saving $1k/month. I simply worked backwards from your numbers and created a scenario where the income spent on rent + savings was exactly the same as the income used by the OO to service the mortgage and pay holding costs.

Figures I originally used were without detailed analysis and many, many assumptions (originally stated) and wouldn't feasibly support purchase of a $500K property. The "rent" part of the equation was introduced by yourself and I've therefore had to revist the analysis with "actual" repayment costs and "actual" rental median prices, not investor orientated expected returns.

Additionally, as I pointed out, there would be no point in me using interest only as that is actually the most favourable outcome for the renting scenario, although the OO still comes out in front. I then went on to use your new numbers anyway and the outcome is even more in favour of the OO, so not sure what you are really arguing here anymore?

Don't have my spreadsheets available but a quick fag packet calc for interest only provides CG of 100K + 5 years of savings $596/month (P&I - IO) = probaly just over $140K.... From an earlier post, the renters after tax savings of 180K compares favourably.

So now after going on about apples-apples comparisons, you want to change the comparison (which you originally brought up) to apples to oranges??

You already opened the door on this one and answered your own question by stating that "units constitute the bulk of rental properties in Sydney". Why do you continue to analyse our example numbers as if you are gauging rental return on an investment property when "the bulk" of renters getting into the market are typically not coming from this type of property? It's unrealistic since "the bulk" are likely coming from units...

Again, please re-read my analysis. There is no "point bolstering" going on, we are in violent agreement on this point and have both made this assumption! All I do is work out how much income you need to have "left over" to pay the rent + savings or the mortgage + holding costs in each scenario and ensure I use the EXACT same figure for both.

Agreed, but your numbers reflect adoption of a typical investor style interest only loan as outlined above.

You are completely ignoring my point regarding the difference between a median rental property and a median house. Yours is not an apples to apples to apples comparison. Anyone who lives in Sydney knows that you cannot rent any dwelling that today is worth $600k for less than $500/week today. 5 years ago maybe you got that house for $400/week.

See above

Regardless, as both I, and yourself have now shown, even using your low rents for comparison the OO comes out in front.

So, a fistful of dollars makes the original poster of 5 years ago more right or more wrong? That's the case I've been presenting since my first post on the subject...

OK so I'll lambast you for being dis-ingenious and mis-representing your OWN calculations, which in fact showed that , ditto, ditto, case, by at least $10k (using your fantasy rents and your own OO equity calc ignoring FHBG) and more likely $37k using realistic/comparative rents etc, and in the 100% purchase case by between $80k (your calcs) and $100k.

Thankyou.

Cheers,

Beej

I will bow to your reverence once you sort out the interest only figures in your analysis and please accept my apologies for your use of my fag packet figures in the first instance...

Anyway, back to work

 

[robots]

hello,

gidday everybody, beautiful day across the country

are there any stats to show how renters are actually doing, ie. do any ASF members who look at investment in the manner singlefished describes got the candy

anyone? have you saved 150k in the last five years?

i know phil ruthen from IBISworld reckons its the gig renting and investing, i buy it for 5-10yrs but i reckon any longer and you are stitched up

looks as though rates on hold for a while Kincella, they should let them go for a while

thankyou
professor robots

 

[prawn_86]

anyone? have you saved 150k in the last five years?

im renting and i saved near 10k last yr while i was at uni and will save >20k this year as im now working. (Not sure what wage was assumed in the initial discussions)

At my stage of life renting makes more sense. We just needed our hot water system replaced at short notice on a weekend, that would have cost about 2 weeks of rental income, plus we have had a new dryer, so there's another week worth. So just in repairs in the last 4 months the owner has had to pay about 20% of the income he has recieved from us.

Saving the difference and investing in a mixture of high interest bank accounts, decent yeild stocks and a small amount of spec stocks.

 

[robots]

hello,

http://www.theage.com.au/victoria/h...ce-jobs-to-move-to-regions-20100615-ybop.html

great work by the government, fantastic news for property owners in these regions and just shows how many "markets" exist with property just like the shonk exchange

its what drove me to Ballarat, housing for 200k, good vline service with line duplication happening, Ballarat University, Ballarat Hospital, Lake Wendouree to be filled and maintained

a very historic regional town

and after the success of TAC's move to Geelong, decentralisation has to continue, any public sector could head out to regional centres, like i mean its only office flog's

thankyou
professor robots

 

[drsmith]

Perhaps the ATO might decentralise to Iron Knob.

 

[singlefished]

Don't have my spreadsheets available but a quick fag packet calc for interest only provides CG of 100K + 5 years of savings $596/month (P&I - IO) = probaly just over $140K....

Should be just over $190K.... forgot about the 50K deposit (need a bigger fag packet )

Still, just over 10K difference over the last 5 years is not that compelling an argument to sway one way or the other.

 

[robots]

hello,

whats everybody going on about then, only 10k out of pocket if rented vs. owning

the press, online, blogger sites, debtwatch have been OFF the radar with propaganda just for the sake of 10k

this is amazing

thankyou
professor robots

 

[schnootle]

While it seems news articles citing local analysts are split between "sunshine and lollipops" and "crash and burn". It seems any article from an international analyst is almost always "crash and burn", like this one

http://www.theaustralian.com.au/bus...5880119320?from=igoogle+gadget+compact+bi_rss

Why is this?

Do the international big shots not understand our situation?, or are we getting too bogged down in talking about supply and demand, shortages etc to step back and realise on an international scale the numbers say we are f**ked.

 

[Mofra]

Because an article predicting a gentle stagnation or property prices underperforming AWOTE in the near future is not emotive enough to sell newspapers?

People are attracted to big news, so predictions that aren't exciting enough will struggle for print space.

 

[CamKawa]

Do the international big shots not understand our situation?,

I think international observers understand the Australian house price bubble very well. They tend to be more independent than our local press interviewing a "market analyst" from one of the big 4 banks.

 

[satanoperca]

There is no bubble in Oz, the RBA said so.

Unemployment down
Inflation up

IR's up again.

Cheers

 

[sinner]

Let's try and take some fundamental academic definitions of a bubble, as coined by those who's job it is to look back upon the past bubbles in history (which were all so easy to identify in hindsight):


The first definition is given as:
A bull market means that the price rise of a particular asset or asset class is driven by the natural, free market dynamics of buyers and sellers. As we know from "Economics 101" (or hope we know), when there are more buyers than sellers of a given asset (or product or service), all things being equal, the price of that given asset will rise. If there are more sellers, then of course the price of it will fall. In other words, "bull markets" are natural and healthy events that can easily last months, years or decades.
A bubble occurs when a normal bull market gains artificial stimulus typically from expansive credit and/or money supply infusions. This artificial stimulus usually comes from increased "injections" of new credit; new money creation that originates from governmental sources (such as a nation's central bank or perhaps from other central banks). The artificial stimulus can also come when the central bank lowers (again, artificially) interest rates to levels below realistic market levels. It may also come from the government's Treasury.

Re: the simple sell, that this is all an issue of supply and demand has been debunked repeatedly by not only the likes of Steve Keen but even the Governor of the RBA has stated it is extremely improbable that house prices are rising due to an imbalance in demand.

http://www.debtdeflation.com/blogs/2010/05/11/is-it-all-“supply-demand”/

So let's drop the supply/demand argument right now, and leave it here for the likes of Macquarie Group analysts still trying to sell REIT shares to people.

What about the difficult sell? That this is a bubble? Let's tick the boxes
* Artificial stimulus typically from expansive credit/money supply infusions: TICK
- FHOG (and expansions thereof)
- Huge money supply to the banks in 2008
* new money creation that originates from governmental sources: TICK
Please see YoY Australian M3 Money Supply between 1991 and 2007
http://www.datadiary.com.au/2010/05...upply-march-2010/australian-yoy-change-in-m3/
* Central bank lowering rates: TICK
What do interest rates in Ausland look like for the last 30 years?

* Artificial stimulus from the Treasury: TICK
http://www.treasury.gov.au/documents/1431/PDF/Design_and_operational_parameters_281008.pdf

The second definition comes from politicalcalculations.blogspot.com:
By our operational definition, for an economic bubble to exist, the price of an asset that may be freely exchanged in a well-established market (houses in this case) first soars then plummets over a sustained period of time at rates that are decoupled from the rate of growth of the income that might be realized from owning or holding the asset. For housing, that income is called rent.

However, we've since found that what people pay in rent, or housing in general, is itself a strong function of income. That observation is confirmed by a 2008 paper by Quan Gan and Robert J. Hill, who found that a strong linear relationship exists between house prices and income percentiles for housing markets Sydney, Australia, Dallas, Texas and the state of Texas.

I am using this definition because it is a functional definition. That is to say: it posits that house prices (in a normal supply/demand driven market) are influenced heavily by the main factors of: construction costs, household income (servicing the debt) and rent (Return On Investment).

So let's look at a chart comparing these factors. I couldn't find a newer one but I am sure it looks pretty much the same.


In the first circled area we can see a normal supply/demand driven market. House prices are higher than their main cost factors but you can see they are also heavily constrained by them.
In the second circled area we can plainly see that house prices have completely decoupled from their main cost factors. Which means either we missed a cost factor which facilitates the prices to decouple so far or our model is completely wrong.

Is our model completely wrong? Hell no. House prices are indeed mainly affected by construction costs, household income and rent.

So what exactly could account for the huge rise in house prices shown on this chart considering household income has not increased proportionally and we have identified the main "bubble factors" to be present in our first definition? We had a normal bull market which had all the "bubble" boxes ticked.

:


It is plain to see that Australian household debt is the "missing cost factor" that has allowed house prices to decouple from reality.

Is this level of Australian household debt sustainable by householders? Is this level of Australian household debt sustainable by banks?

To my mind, these are the only two questions which matter and the answer is: NO.

House prices go up until they don't. In Australia we have the worst of both worlds, in a recession there will be no credit available for those wishing to enter the market and if there is no recession then all those WA miners will push property prices and IR back up at which point those in Sydney and Melbourne (not to mention FHOG recievers all over the country who didn't lock rates in) will be back where they were in 2008 - complaining bitterly about affordability every time the RBA knocks the rate up another notch - while our standard of living decreases.

That is honestly how I see it in Australia:
Either we take the recessions deflationary pain now in all those sectors propped up by cheap credit, or we ALL take a huge standard of living decrease within the next 10 years and a toiletbowl economy.

 

[nunthewiser]

Now call me silly but that chart on the Intrest rates looks to me like forming one bewt "cup and handle " formation ...

GO LONG BOYS GO LONG!

 

[wayneL]

Because an article predicting a gentle stagnation or property prices underperforming AWOTE in the near future is not emotive enough to sell newspapers?

People are attracted to big news, so predictions that aren't exciting enough will struggle for print space.

Do they pay for these articles? I predict Oz housing will be like Detroit, only far worse.

Where do I send it?

 

[sinner]

There is no bubble in Oz, the RBA said so.

Unemployment down
Inflation up

IR's up again.

Cheers

Hahahahaha. Haha.



In Australia, if you get paid for 1 hour of casual work per fortnight you are considered employed by the ABS.

I am sure their inflation statistics on the other hand are completely honest and unmanipulated numbers derived from an objective reality based model