Hi guys,
I'm currently reading a Michael Yardney book, which i am quite enjoying.
But it has got me thinking about the magical 10% capital growth that property is supposed to have.
Brisbane Median house prices are $393,000 at the moment according to Yardney. If growth continues at 10%, we're looking at a median house price of over $1,000,000 by 2017.
Now, if we look at wages, which i assume increase in line with inflation, and we take the median wage to be $55,000 at the moment, by 2017 the median wage will be only $74,000.
So in 2007, annual wages are about 14% of house prices. By 2017, annual wages are 7% of house prices.
Or to put it another way, assuming you managed to raise a 20% deposit, and assuming interest on mortgage was 6%, repayments on the family home would come in at about $57500, about 77% of wages (the rest of your money goes to the taxman i guess)
I also did the same projection to 20 and 30 years later, but obviously the figures are too ludicrous to print.
So, am i missing something here? How can this continue? I realise i'm not the first to think of this, so surely there is some simple answer out there.
High growth cannot be sustainable in the long run or nobody would be able to afford a house. I guess all you have to ask is can it keep on happening in the foreseeable future?
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
"So, am i missing something here? How can this continue?"
No.
It can't.Historically, periods of falling real house prices prevented house prices from spiralling ever further from wages. More recently, this hasn't happened. Instead the gap has been filled with ever increasing amounts of debt. There's a limit (somewhere) to how far that can go, too. Here's some charts for you:
Source: Nigel Stapledon, Long Term Housing Prices in Australia and Some Economic Perspectives.Cheers, F. [cowboy2]
so what happens next?
bruxism wrote:so what happens next?Dunno. Next is probably prices up, down or sideways. Forget next. The near term is unpredictable. What this can do is inform your expectations of future property prices, so that your projections remain within a broad band labeled 'possible'. Many people I speak to have long term (ie mortgage-length) expectations that are simply absurd.
Cheers, F. [cowboy2]
Some interesting trends emerging from the UK at the moment. With some months of house price falls. OK its a different market, but one that has shown similar performance to the Australian market.
bruxism wrote:So, am i missing something here? How can this continue? I realise i'm not the first to think of this, so surely there is some simple answer out there.lol just do like 70% of the arm chair experts out there-just ignore it and it will go away, after all property is a sure fire way to get rich and is guaranteed to double every 10 years you do realise dont you?
so, if the idea of averaging 10% growth over the next 30 years is absurd, then what can we expect?
What I mean is, I'm yet to join the property market and from a lot of books the strategy seems the same.
1. Buy
2. Wait
3. Buy more against equity
4. Repeat.Now if a huge downturn can be expected…or even a long "levelling off" period where things stay the same, surely everyone running this kind of strategy is in ALOT of trouble.
I hate to be pessimistic but it seems like something terrible is going to happen and nobody seems to be mentioning it.
Should i just follow the pack, buy hold and ignore the inevitable..or should i do like chicken little and stay out of this crazy business?
I have to say I am also thinking this way. There is too much uncertainty around at the moment. The sub prime crisis. The US is now in recession, the US property market is going backwards, the british property market is starting to go backwards. British lenders are starting to tighten their lending criteria (rejecting 7/10 credit card applications) and I can only think the same will be happening here. All I can see supporting the property market at the moment is the demand created by the anticipation of further capital growth. Currently I don't think we can count on another doubling of property values over the next 10 years as wages will not double and the income multiples being lent currently are at about the top of the range.
I agree that people who followed the buy, mortgage to the hilt and buy again strategy will be in serious serious trouble, particularly after another 2 interest rate rises.
hw.
3 bedroom houses on small blocks are already selling for in excess of $2million in my neighborhood.
some houses that aren't even fit for people to live in sell for over $2million
I believe 08 will be a good time to buy property, the higher interest rates coming will slow down price growth, some areas will go backwards.
So in the meantime less people are buying houses, developers are building less spec homes.
People keep pouring into Australia in record numbers who need some where to live, it's like a pressure cooker.
Meantime it looks like the share market is in for a rough ride over the next year or two, this might intise investors back to property. BOOM.I dont subscribe to the notion prices wont keep rising, don't get me wrong I am fully aware prices rise and fall. But for the millions of people who own property price rises are like shifting sands. See I brought my 1st home in 1984 for 40K, 10 years later I sold that home and upgraded to a better home. At the end of the day I only had to put in an extra 100K on top of my sale price to upgrade to a better place.
Once your on board your properties are going up like every one elses so it's status Quo, the real issue is for 1st home buyers and people who brought at the top of the market and over committed. For the other few million owners it's a none issue.
Even 1st home owners are adapting to get on board, buiyng properties with others, when the equity builds up they will buy another.What happens if prices stop increasing? investors stop buying, builders stop building. Where will people live?
If the return isn't there people wont invest in property, and not all of the million odd renters want to buy a house.
All the talk about the US and their property troubles, today I read in the NY Times investors are comeing back into the market and buying multiple houses as rental demand is strong in the right locations.dreaming wrote:IMeantime it looks like the share market is in for a rough ride over the next year or two, this might intise investors back to property. BOOM.
A friend of mine got a sudden case of "loose bowel syndrome" during the bear market last week. He had just chucked 350k into super that was all on the ASX, he was in a real panic and I could feel the fear oozing out of the phone.. he was trying to find a broker quickly to sell up and couldn't so he didn't. Then he realised that it ws best for him to ride it out and asked why others are selling I told him that some of them might be margin calls and explained to him what that was.
He then talked about his property portfolio and asked me how I felt about mine for which I feel okay about then he went on a big downer about a 1.6mill Off The Plan deal he committed to and he had a premonition of it suddenly being worth a lot less very quickly that is where we left it at.
The point is there is a lot of money flying around with invetsors that are not that savy and very flighty. He is a wealthy person and losing a motza wouldn't hurt him but just imagine his premonition came true and others caught the dreaded fear trip all at the same time…..
with respect to the property question my comfort zone was in holding houses that are entry level the luxury ones sounded very risky in those panicked moments.
This was the first panic episode I have witnessed here in oz.
In previous years when the share market has nose dived and created a corresponding boom in the residential property market there have been several other factors involved which are different this time.
1. There had been significant interest rate cuts when the market crashed. (Rates are going in the other direction this time)
2. The residential property market had been under valued preceding the crash. (Residential property is now bordering on being overvalued)
3. Mortgage lenders had not been experiencing difficulties raising finance or been under the same scrutiny from the markets about the quality of their loan portfolio. (Sub prime crisis).This is a link to an interesting set of housing affordability papers. Haven't had time to read them yet, but thought some people may be interested.
I personally would be happy if property doubled over 20 not 10 years.Not the greatest investment i know but if i get the properties at or close to cashflow neutral quick with rising rents or paying loans down.That would be good for me. I am now 30. making me 50 in twenty years. Now if i build up a portfolio of several properties in the first 10 years or so.Allow there value to rise over the following years and bingo a nice retirement fund ( I actually dont want to retire till 60).
My personal goals are not too retire rich in the next few years. My goals are
Retire at 60
Own around 5 properties outright at the age of 50-60
Have axcess to cash during my working life( equity)
Nice amount in my super.
Enjoy my life all the way through.This is very achievable even with lower than expected growth. If its closer to 10% well thats even better.
I am with Devo76, you only need a handful of properties to set yourself.
Surely, Russell Crow’s Cowper Wharf $16 mill. apartment is not going to be worth $32 mill. In 7 years (using the mythical 10% growth), however as we saw in the last boom between 2001 and 2004, properties that had a lower base, had a more dynamic growth. They had “room” to grow. I believe that it is easier for an area with a median price of say, $250K to double up in ten years, more so than an area with a median price of $2.5 mill.I have been investing for over 7 years, and there is always something happening in the world economy, local economy, the sun, the sunshine, the neighbor, etc, that stops people from investing. Some of my “chicken little” acquaintances have seen the last 7 years pass by and have nothing to show for.You can always work hard at a job and do nothing and withdraw your super in a time like this.The problem is that the average investor only knows how to speculate on growth and have no exit strategy when they buy. If you have 5 properties fully paid at the time of retirement, averaging $300 pw rent x 5 properties = $1,500 per week. (in today’s dollars), it doesn’t matter if they grew up in price, you still have the cash flow to support you. Off course capital growth is always welcomed, however the deal needs to make sense today, not based solely on growth. NO ONE has got the crystal ball to predict growth.
The right time to buy property is when you are ready.
devo76 wrote:I personally would be happy if property doubled over 20 not 10 years.Not the greatest investment i know but if i get the properties at or close to cashflow neutral quick with rising rents or paying loans down.That would be good for me. I am now 30. making me 50 in twenty years. Now if i build up a portfolio of several properties in the first 10 years or so.Allow there value to rise over the following years and bingo a nice retirement fund ( I actually dont want to retire till 60).My personal goals are not too retire rich in the next few years. My goals are
Retire at 60
Own around 5 properties outright at the age of 50-60
Have axcess to cash during my working life( equity)
Nice amount in my super.
Enjoy my life all the way through.This is very achievable even with lower than expected growth. If its closer to 10% well thats even better.
really to achieve over all return on investment of 10%p/a a property only has to include capital growth of 6%pa if you include the 4% rental return.
I think you should calculate your returns including the rent,…… just like when share investors calculate their 5 year share price return figures they include the dividends they have received.
I spoken to few people who are retired now or semi-retired. Some have few $$$ others not as much. But all made one interesting comment " you actually need less money what you think(when retired), you eat/drink/travel/party less and already have everything paid out"
Makes you think….the wife and i made a decision about how we would live our lives 5 years back when we bought our PPOR. We have no desire to be the richest stiff in the graveyard. But also we dont want to be 50 and afraid of retirement because we have no money. We are aiming for the middle road.Invest,save and have a great life along the way. The majority of the people i know will be lucky to own there home and have a modest super at retirement. This can be said for most australians.My superanuation projections will put me into $65,000 PA at 60( In todays dollars with no extra contributions) Plus my wifes super and if we have a few IP,s paid for. Well thats a great retirement in my eyes.We will not be millionares but we will be happy,well off and living every minute.
Growth may not alway be assured, but no matter where we are in "the market", there is always deals out there and money to be made. The biggest mistake, and regret I've ever made is procrastination!!
"Time in the market "is better then "timing in the market"
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