Forum Replies Created
Hi Ibuy,
Originally posted by Ibuycashflow:Have you not heard of Price Elasticity of Demand (economics 101 again) Price is directly influenced by demand.
Yes, this I understand and agree with.
Lower interest rates will of course make it more affordable to buy a house, hence increased demand.So a relatively small number of people who previously couldn’t afford to buy a house can now afford to buy a house as housing affordability rises. Once these people have bought, the additional demand will abate unless interest rates continue to fall.
Your views on value, whether it be fair or rational only become relevant regarding supply. If supply can match the demand then prices should remain the same ie land value and building cost.I concur.
Curious to know what your investment fundamentals are?I think the important thing is to maximise returns! More later. Next episode of Myth Busters on Monday, and I’ll wrap this series on Wednesday, I think it will be pretty clear what the house price fundamental is by then.
Cheers, F.[cap]Hi Woodsman, I was about to state that I think there is a causal relationship between house prices and interest rates, but I have reconsidered!
Interest rates are directly influenced by inflation. When inflation falls, the RBA ‘lowers interest rates’.
Falling interest rates have an inverse effect on investor psychology & sentiment and the wealth effect. Investors (and consumers in general) feel wealthier, are prepared to take on more debt, and become less risk averse (they can buy their way out of trouble). At the same time the economy appears to grow as debt funded spending lifts employment, production and, well, house prices!
This becomes a self-supporting cycle, as evidenced by the astonishing Australian debt statistics (check superman’s post regarding inflation vs house prices for links).
In a bubble situation (ie where ‘Market Price’ outstrips ‘Rational Price’) the underlying broad measures of inflation and particularly wage inflation do not keep pace with this change.
I guess to fully answer your question, I believe that interest rates are the ‘Flap of a Butterfly’s Wings in Brazil (that) set off a Tornado in Texas’ (property market bubble) but they don’t alter the ‘rational price’ one bit!
Cheers,F.[cap]Thanks Pelican,
It sounds like you currently have a win-win situation going. I’m glad all wrappers don’t fit the Jenman mould!
It still sounds risky to me, but I guess there’s always some risk in investing!
Cheers, F.[cap]Originally posted by Monopoly:How do YOU (or anyone for that matter) really define “fair value”??? [blink]
You’re right, it’s not “fair value” either… but I don’t know how else to describe it! Rational Value perhaps?
Cheers, F.[cap]Originally posted by woodsman:So whose figures are right? Don’t ask me I have no idea…[confused2]
It’s alright Woodsman, I’ve taken it easy with the links on today’s episode.
Thanks for the ASX link – top info.
I agree, housing statistics are a disgrace in this country. The same datasheet I quoted above has a column of RBA medians for Melbourne which look rather different again![weird]Year – REIV – RBA
1971 – 18,643 – 13,400
1981 – 61,217 – 44,000
1991 – 176,696 – 127,000
2001 – 313,043 – 225,000
2004*- 366,000 – 268,000If only there were a reliable source!
Cheers,F[cap]Huzzah! I think you’re onto something here superman![smiling]
Professor Abelson’s report title, content and the passage I lifted were all focussed on real house prices (as in, adjusted for inflation) whereas we can only assume the quotes must have referred to nominal house prices! Kudos also to Derek and OSienna for alluding to this difference.So let us look at the data I have on hand for Melbourne:
Year – Median HP
1971 – 18,643
1981 – 61,217
1991 – 176,696
2001 – 313,043
2004*- 366,0001971 – 18,643
1978 – 52,313
1985 – 104,626
1992 – 173,913
1999 – 243,478
2004*- 366,000Thanks to the REIV for the stats.
What stands out in these tables is that during the 70s and 80s median house prices more than doubled every ten years in Melbourne, but despite the record recent boom, this trend has not continued. Why? What has changed? What does this mean for the future?
My guess would be (and this speaks to the crux of the issue), that house prices are not a function of time. I honestly believe that house values (and selling prices) are in no way changed by the passing of time, (except for the ‘wear and tear’ factor).
I believe the factor that causes house values and prices to increase is inflation.
What happens if we adjust ten thousand dollars by CPI each year over the same period?
1971 – 10,000
1981 – 26,245
1991 – 58,055
2001 – 74,021
2004*- 83,3211971 – 10,000
1978 – 20,101
1985 – 37,782
1992 – 61,132
1999 – 70,328
2004*- 83,321Thanks to the RBA for the stats (Melbourne CPI)
Once again we find that during the 70s and 80s the CPI measure of inflation more than doubled every ten years, but more recently this trend has not continued!
So perhaps it is misleading to look at history and state:
‘House prices have doubled every ten years on average’
and definitely misleading to state:
‘House prices double every ten years on average’ (given the implied future prediction of this statement, and honestly what would be the point of writing it if not to imply that this is an ongoing trend?)While on the other hand, the following statement is both true and avoids the inference that nominal house prices will continue to double every ten years indefinitely:
‘During the 70s and 80s inflation roughly doubled every ten years and house prices adjusted accordingly’
What is more, somebody who is giving financial advice to others (even on a www forum) would be well advised to add as a caveat:
‘However, inflation has long been in a slowing trend, therefore it is unlikely that house prices will double at the same rate in the future.’Cheers,
F.[cap]PS – nice work on the mathematics! I’ll have to put in some more time to understand all that!
Yes superman, the TV show that inspired me is on air here. Very funny stuff – The last one I caught involved a jelly filled dummy peeing on an electrified railway line[weird]! When compared to Adam & Jamie’s efforts, I think my occasionally tenuous links between ‘facts’ and ‘evidence’ stack up rather well![biggrin]
I have yet to decide which real estate myth to bust today. I guess that will have to wait until my lunch break!
Cheers, F.[cap]Hi MoJoJo,
That’s a good theory. Unfortunately I can’t find any statistics on the matter, but the situation you describe would very quickly lead to a critical shortage of rental houses and units (or a massive increase of people living on the streets!). This undersupply would lead to a sudden spike in rents (and perhaps government rent controls?). I can’t find evidence of this situation.
Regards, F.[cap][tired]Ok, sure.
Pelican, I would still be interested to hear if you have found a way to avoid the issue I mentioned. PM me if you’d prefer as things are getting silly here![wacko]Thanks, F.[cap]
No Ms Monopoly[crying], in my previous post I suggested that there are dangers in arranging wrap finance in the current economic climate for the reasons stated above. I am genuinely interested in any solution to this problem.
I may be mildly ignorant by your standards, but a troll?
Cheers, F.[cap][blink][blink]
Wow. I’m sorry for offending you Ms Monopoly. I have tried to be straight down the line with all my posts, including the one to Derek. I have a great deal of respect for the man as his posts are generally very interesting and considered, as I had for you until the last couple of days. While we obviously have differing views on the future and the best way to tackle it in regards to property investing, duplicity is hardly my style.Let’s get back to the sharing shall we?[blush2]
Cheers, F.[cap]Hello Woodsman,
If you don’t think many average folk believe that ‘immigration is destroying house affordability’, and ‘we have 2 IPs in Sydney which can’t grow any more because of the green wedges, so they will go up in price because everybody wants to live in Sydney!” then I don’t think you’ve been spending enough time around the water cooler! If nobody here believes the myth, that’s great, my objective was already achieved, I just wasted 10 minutes typing![blush2]To clarify the rents issue, I clearly stated that ‘Rent has failed to keep pace with house price inflation.’, not broader inflation.
Oh, and regarding adding ‘value’, I may simply be lazy, but I would rather buy at a reduced price than put in a whole lot of effort![evo]
Thanks for your suggestions.
Cheers,F.[cap]Hi Pelican,
I’m curious about the wrap deals you are working on. I understand how this kind of arrangement can be structured to provide a positive deal for both parties in a rising market. However, what happens if the price of the property declines and the wrappee knows it? If they are facing a future capital loss, why would they not simply walk away, leaving you to deal with the negative equity, and themselves in a position to buy a cheaper or better house instead?Cheers, F.[cap]
Hi Derek,
Another top post as always. I must admit I’m a little surprised only 57% of the suburbs in your survey had achieved the double in 10 years ‘rule’ over the last 10 years.Now with the data you have at hand, might I with all due respect enquire whether you believe that ‘House prices on average (will) double every 10 years’ over next ten, twenty and fifty years?
Thanks again,
F.[cap]Allways a pleasure Byronent!
Somehow though, the gist of your last couple of posts seems to have eluded me…[blush2]
I assume you are taking a stance opposing my assertion that the recent house price boom was caused by and will be sustained by population expansion?If you’ve already made your point and it’s gone over my head, please be a little less cryptic! That’d be [specool]!
Cheers, F.[cap]
Originally posted by byronent:Man you must have no life or just simply bored <edited>less.
Don’t get uptight if you’re having trouble digesting the MYTH BUSTERS series Byronentent, I will ensure that when the MYTH BUSTERS series draws to a close I’ll write up a succinct summary and PM it to you![specool]
Stay tuned for tomorrow’s exciting episode of MYTH BUSTERS!!!
Cheers, champ.
F.[cap]Thanks again for your insight and carefully considered thoughts superman.
Originally posted by superman:thanks to the rise in debt levels, moves in interest rates are three times as potent as they were in the early 1990s.Fortunately I think this is the reason we won’t be seeing 80’s-style interest rates within the next decade or so. Because the RBA (nearly said Fed, I’m stuck in US atm), can now pack a more concentrated punch, i.e. 0.25% increases.
I wonder whether the AMP link may have understated the interest rate rise issue. Not only do Australians hold almost 3 times more debt, but a .25% increase from 7 percent is more significant than a .50% increase on 12% is it not?
So in order to support <edit – That which must not be named> indefinitely, this debt must continue to grow exponentially… again… this will not work. Prices cannot appreciate above inflation indefinitely.I agree, but what factor will be the ultimate constraint on this growth? I naively thought it would be when the savings level hit zero, but people are still consistently spending more than they earn!
I think this could potentially be the million dollar question.[wink2]
The Reserve Bank has released some interesting information here:
http://www.rba.gov.au/rdp/RDP2003-08.pdf
but I have not yet fully read and digested it.Cheers again,
F.[cap]Originally posted by woodsman:F, so what are/have you investing/invested in?
Have invested in: Residential real estate & vacant land (my best investment to date), bank bonds, shares (directly & via funds), precious metals, cash and collectables.
Currently invested in: Direct shares, gold, silver, cash & collectables. Oh, and depending on POV, my PPOR and holiday house.Why? Any comments on this myth? (I decided to go with what I believe to be a far less contentious issue today.[wink2])
Cheers, F.[cap]
Originally posted by schawel:3. The rent is below asking price.
Then logic indicates that your house is tennanted!
[blink]While slightly off topic (sorry!), I think it is interesting to consider household indebtedness when looking at the graph of income vs house price.
A graph of household debt as a percentage of annual household disposable income can be found here under 01/12/04 Household debt in perspective 161KB
House prices broke their strong historical relationship to income in the mid to late 80s. Until this time household indebtedness was at relatively low levels. From the early 90s, the indebtedness statistics also broke trend and at a casual glance appear to be accelerating at similarly unsustainable levels:
30% of annual income in the 60s
40% in the 70s following inflation in the high teens
45% in the 80s
90% by the end of the 90s
and now at a whopping 140%!!!One interesting result of this is that an interest rate rise now packs 3 times the punch of the early 90s:
thanks to the rise in debt levels, moves in interest rates are three times as potent as they were in the early 1990s.Is there a relationship between household debt as a proportion of disposable income and house prices as proportion of (gross?) income?
If so / not then what are implications for house prices over the near to medium term?Any thoughts?
Cheers, F.
