- The nation’s biggest fund manager said yesterday it would take until 2015 for rents and wages to catch up with the boom in house prices, and warned there would be no rise in the housing market until they did so.“In the absence of sharply higher interest rates or unemployment, both of which seem unlikely, Australian house prices are now in for a decade or so of stagnation as rents and wages catch up to justify current prices,” he said.
(That’s a LOSS in real terms)
But I thought house prices were pretty much guaranteed to double by 2015!?
Cheers, F.[cowboy2]I think it’s still possible that they will… for example even if they’re off by just a year and half and prices are flat until 2013 sometime, that’s 18 months left over for prices to shoot up and double by 2015
Sorry Ian, either you or I forgot to push the sarcasm button. Clearly no rational person can expect any house purchased today to be worth double in ten years (without some property-specific external influence or inflation-driven 12-15% interest rates).
Cheers, F.[cowboy2]I agree with Ian in principle. My parents bought a house at the beginning of the 90’s. They sold in 95-96 for the same price they bought it. That’s 0% gain in 5 years (shouldn’t it be up 50%? if it doubles every 10 years) BUT that same house went up for sale in 2000 at about 80% growth. So in 10 years the house almost doubled in value (it wasn’t that well situated and had small land content) but the actual real growth didn’t happen until the last 5 years, probably the last 2.
My fiance bought a house in 2001, in 2003 she had it revalued and it had almost doubled in value! But for the previous 10 years… nothing.
So it may well be that house prices sit around doing next to nothing until 2015, but then there may well be a sudden appreciation in value. So much has to do with location and sentiment. There are still houses in Sydney that are growing in value! Shock, gasp! Though in general the overall sentiment is that houses in Sydney are not growing.
10 years is a long time. Anything could happen in that time.
Seems the optimistic view is that appreciation will equal inflation. Lets, again optimistically (for property), put this at 3%. So the real cost of ownership over the next decade, assuming 7% loans and 1% rates, maintenance, etc. is 5%.
I.e. if you are paying 5% of the value you would purchase in rent, you are breaking even. E.g. my requirements will cost me roughly $400k, if I can rent this for 400pw I am square. Well turns out I can rent the same for considerably less than that.
Oliver put the yeild before costs (which is what is relevant here) at 3.1% late last year.
http://www.amp.com.au/au/3column/0,2338,CH4669%255FNI9451%255FSI56,00.html?via=AMPAUAlternateLeftNavBut again for conservative numbers, I will take 4% for Brissy. Therefore, if I rent I am 1% of 400k better off and I can in turn invest that $4000 each year (conservatively at 5%, but I’m not conservative).
The first thing one might counter with, is that there is the potential for house prices to appreciate faster. Ah, but prices can also fall and often do in real terms. I do not think I would be out on a limb to suggest that a fall is more likely now than at any time in the last 5 years (more specifically in Brisbane for my interests)?
So in conclusion [biggrin], if house prices do in fact track inflation, then home ownership will remain a poor financial decision.
So ian’s point is that it is possible and foundation’s, that it is unlikely. No problem.
If you rule out high inflation (i.e. above 3%), I would add, that it would be “exceedingly unlikely” because such a scenario would result in 2015 prices being 1.5 times more expensive than today, in real terms. More than 10 times the average salary!!! Surely only the remotest of possibilities.
Foundation,
I bought an investment property in 2001 in Hunters Hill Sydney for $660,000.00 and had it valued last week at $1,580,000.00, so i hope it does double – only time will tell.
resiwealth
Agree with Surreyhughes’ assertion of liong periods of stagnation followed by relatively quick bursts. The Melb Median Prices for the 90’s were as follows: (I know median stats can distort so please don’t howl me down [blush2]- I am a relative newcomer to the site!)
1990 – 147k
1991 – 142k
1992 – 136k
1993 – 145k
1994 – 146k
1995 – 145k
1996 – 153k
1997 – 170k
1998 – 198k
1999 – 208k
2000 – 222k
source: ABSMy point is the avg in 1990 was 147k and in 1996 was only 153k yet the burst came in a fairly quick time (was more after 2000). Also, I think you could pick a point in most 10 year gaps where sometimes they have less than doubled and other times where they have more than doubled. All depends on whether you are looking at a flat point, or before / after a boom.
Cheers
A slightly different set of numbers to the REIV medians… but anyway, here’s the way I prefer to look at numbers:
Year MED$ NomCG CPI* RealHPI RealCG CG2005
1990 147k – 3% 8.0% -11.0% -$16k -$24k
1991 142k – 3% 5.3% – 8.7% -$12k -$17k
1992 136k – 4% 1.9% – 6.1% – $8k -$11k
1993 145k + 7% 1.0% + 5.6% + $8k +$11k
1994 146k + 1% 1.8% – 1.1% – $1k – $2k
1995 145k – 1% 3.2% – 3.9% – $5k – $7k
1996 153k + 6% 4.2% + 1.3% + $2k + $2k
1997 170k +11% 1.3% + 9.8% +$16k +$20k
1998 198k +16% 0.8% +15.7% +$31k +$38k
1999 208k + 5% 1.3% + 3.8% + $7k + $9k
2000 222k + 7% 3.9% + 2.8% + $6k + $7kSo if you’d bought a “median” [biggrin] house in Melb in 1990, by the time 1996 rolled around you’d still be dragging an effective loss of $50,000 in today’s dollars. Considering that houses are far more over-valued now than they were in 1989…
Yup, this aint gonna be pretty.
How will the mum & dad investor types feel in 10 years once they realise those 2 median houses they bought to set themselves up for retirement have actually cost them hundreds of thousands of dollars in REAL WEALTH?
I think a full-blown crash would serve them better.
Me too.
F.[cowboy2]Originally posted by dsmith:
My point is the avg in 1990 was 147k and in 1996 was only 153k yet the burst came in a fairly quick time (was more after 2000). Also, I think you could pick a point in most 10 year gaps where sometimes they have less than doubled and other times where they have more than doubled. All depends on whether you are looking at a flat point, or before / after a boom.Cheers
great post dsmith
I don’t understand peoples getting themselves in a knot over property market and where is it heading – everyday there’s a new opinion. The facts are, compared to historical wages/house price ratio they are on average overvalued. The best way to sum up what will happen is to look at what happened last time…. it wont crash (in nominal terms) but it will be a severly underpeforming asset for a looong time.
The property maket doesn’t change dayly or monthly its not like other financial markets.
What was the percent return between 1989 median prices and 1999 median prices (10 year doubling!) in REAL terms for the example we have above – (Foundation)
Cheers
Can you also ples let a novice like me know Foundation, how is the Real CG calculated on your table (second last column).
Thanks
D
Incidentally, I just found the original article, complete with pretty graphs.
Enjoy:
Link HereCan you also ples let a novice like me know Foundation, how is the Real CG calculated on your table (second last column).It’s just the difference between how much the asset should be worth if you adjust for inflation and how much it’s actually worth.
For example, if you’d bought that house for 147k in 1990 and inflation ran at 5.3% over 12 months, you’d need that house to be worth $154k just to give you the same purchasing power return if you were to sell it.
If as in your example it is only worth $142k after 12 months, were you to sell, you would actually buy $12k less with the proceeds of the sale (in 1991 dollars).
The last column (sorry they got all screwed up when I posted) contains the same gains / losses translated into 2005 dollars.Hope this helps, and that I didn’t @ook up too badly anywhere.
Cheers, f.[cowboy2]Of course if the asset returns 5.3% in rent during that period, the asset has neither appreciated nor depreciated in that time. so growth of only 1% on a median priced home at say $280,000 is real growth of $2,800 in that case.
http://www.megainvestments.com.auJohn Carroll
Hello Foundation,
i would be interested , if you could detail your successes so that we can all ascertain the level of your insight. My concern is you are giving negative information to people because you sell what? Attempting to link CPI to capital growth is pointless.
i will happily debate some of these points with you, all in good fun of course.
Originally posted by tony wpb:
i would be interested , if you could detail your successes so that we can all ascertain the level of your insight. My concern is you are giving negative information to people because you sell what? Attempting to link CPI to capital growth is pointless.I realise this wasn’t directed at me, but couldn’t resist…
I have a high regard for people that have ‘runs on the board’ as far as investing goes – but it doesn’t mean that someone can’t have a valuable opinion/argument whether or not they have disclosed what they have/haven’t done in investing.
I’m only 25 (3 years out of uni) so haven’t got the runs on the board, the only meaningful decision I made to do with investing was to not purchase a house about 12 months ago. I instead have been in the share market for the last 9 months – In hindsight from where I’m sitting, a good decision…
The problem with analysing the property market is anyone with runs on the board would have owned property over the last boom, and made significant money – no one is going to argue against that! Any decision to invest in property during the 90’s as we sit now can be viewed as sheer brilliance. In another 5 years time we’ll have a good assesment of investments made today.
What Foundation is doing is talking about investing in property NOW. His view is directed at the fundamentals driving the property market, the only thing is eventhough those fundamentals haven’t changed for the last couple of years -people arguing the ‘overvalued’ point who were laughed at 15 months ago are now getting some ‘air’ time on the forums without being shouted down because the figures are in, and sentiment has changed.
It is hard to argue fundamentals when you have people saying ‘but someone down the steet just sold their house for X (insert large figure)’ and fair enough because when the greater fool theory is previaling in the market place you might as well stay in for the ride….. Now that actual sentiment has changed, fundamentals will give you a much more accurate picture of where its ‘likely’ to go.
… Measuring real growth when calculating capital growth (ie factoring CPI) is crucial to calculating whether the investment has returned any real money in your pocket. If you sell an asset in 10 years time for the same price as today – you have lost value, as the purchasing power of that money will have decreased dramatically (ie buying a simple pie for lunch could cost $10!)
TJ
there is an important concept being missed here – return on capital. it’s like saying the same about cash deposited at the bank… it will be worth the same in 10 years but it hasn’t gone down in real value as you have had the return on capital to account for. There are a heap of other factors to consider of course – risk, gearing, tax etc
http://www.megainvestments.com.auJohn Carroll
Originally posted by tony wpb:Hello Foundation,
i would be interested , if you could detail your successes so that we can all ascertain the level of your insight.I have already detailed my investing history on this site. Use the search function. Current real estate investment situation is one PPOR and a modest beach house. I have no immediate intention to invest further in RE, although I am watching a property with subdivision potential (adjacent to Res1 and unnofficially the next area for rezoning). If I can purchase this property for 30% off asking price it should turn a handy profit as a 25 (large) block subdivision.
My concern is you are giving negative information to people because you sell what?Concern duly noted, but I sell nothing. I am an analyst in a field completely unrelated to real estate. I assure you my motive in posting ‘negative’ information is to present what I see as an inevitable, unprecedented and nationwide adjustment in percieved and realised value of housing assets. I plan to take advantage of this opportunity. Those who read my posts can choose their own adventure.
Attempting to link CPI to capital growth is pointless.I assume I missunderstand this statement. The absolute minimum aim of any investor is to match the rate of inflation. Anything less is a bad investment.
If you mean there is no correllation between house price inflation and consumer price inflation, I also disagree. While the cycles do not always coincide, there is a relationship. This relationship has a logical origin, as wage inflation follows (leads?) consumer price inflation, providing home buyers increased nominal purchasing power. This is the main driver of sustainable house price inflation.I’m always happy to be corrected or challenged.
Cheers, F.[cowboy2]Foundation,
I thought, being relatively new here, that you were nothing but an old curmudgeon. I now have to eat crow (fortunately not difficult for one born in South Australia) and admit that you are a wily, cranky, experienced curmudgeon. You may not be a hoopy frood, but you really know where your towel is. (I’d note that TJamesX may be young and unpropertied, but is also worth a listen.)
Foundation, I agree with everything you say in your latest post. And I’ll add to it. Mum and Dad really aren’t going know that they are making a loss, admit it. But they are making a loss, and will for at least the next 5 years at a guess. Where Mum and Dad will come unstuck is if the RBA forgets about them for ONE second and lets interest rates get too high. ONE wrong decision and then we will have a crash, and not one that will be good for M&D.
I should know, I have some refugees from the 89 crash as tenants.
What I hope, for M&D’s sake, is that they come out of their investment with about the same return as they would have gotten from super, after all the charges fees etc. But I’m an optimist.
Anyone reading this had better apply just a bit more analysis than M&D if they want to do better.
Positive end message: Look at Foundation, the property bear (in today’s market) STILL prepared to buy if the deal is right and the value-adding opportunity is there. Good deals in a hard market are made, not found, and if you haven’t figured that out, buy the book that the word book will doubtless link you to.
Interestingly very few economists/analysts are prediciting a house price crash in nominal terms, just about everyone expects a decade of stagnation.
Shane Oliver concludes:
In the absence of sharply higher interest rates or unemployment, both of which seem unlikely, Australian house prices are now in for a decade or so of stagnation as rents and wages catch up to justify current prices.If you look at the booms of the early and late 80s, both were followed by very modest falls in nominal terms, followed by a long period of stagnation. This boom-stagnation-boom-stagnation cycle is quite different to other real estate markets such as the UK, where nominal house prices have crashed 30-40% in the past, and I suspect will crash again this time.
I don’t htink foundation, or anyone else needs to document their “successes” to be able to analyse economics and discuss the state of the market- I for one, appreciate the ongoing perspectives.
Just a thought on properties doubling… perhaps an exit plan might be to SELL when a property doubles from purchase price (or increases by 60% or 120% or whatever), no matter how long that takes. A bird in the hand…
kay henry
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