- alani wrote:if yields keep rising because of lower interest rates and huge rental demand, then wont house prices keep rising, resulting with the rich getting richer and the poor getting poorer? that is, by 2020 there will be a greater percentage of renters than todays percentage. basic economics really!
alani, how do the tenants afford the rental prices needed to cover the property loans of the rich when wages aren't increasing at the same rate?
Banks have again stressed (after that little stock market thing today) that they will not pass on all (if any) RBA cuts. Swan is finally admitting that times are going to get tough for mortgage holders.
In the same markets where rental demmand is huge sydney, melbourne, ACT etc – there are 5-10x the amount of homes for sale as what are listed for rent. Sucks for everyone right now but atleast the tenants don't owe the banks more than what they have mortgaged is worth…
http://www.news.com.au/business/story/0,27753,24410702-462,00.html
ummester wrote:alani, how do the tenants afford the rental prices needed to cover the property loans of the rich when wages aren't increasing at the same rate?
Are you worried about the rich not being able to make the repayments now ?
Ever heard of negative gearing ? That's where the taxpayer helps you make the repayments now and in 2020 when you become positively geared you pay some tax back.Quote:In the same markets where rental demmand is huge sydney, melbourne, ACT etc – there are 5-10x the amount of homes for sale as what are listed for rent.When rents go up high enough that buying becomes cheaper they'll sell. The problem we have now is that the rents are too low (or interest rates too high). If rents were never lower then the interest repayments on a property we wouldn't have a rental shortage then.
harb wrote:Are you worried about the rich not being able to make the repayments now ?
Ever heard of negative gearing ? That's where the taxpayer helps you make the repayments now and in 2020 when you become positively geared you pay some tax back.I'm not worried for myself.
Negative gearing is under review.
harb wrote:When rents go up high enough that buying becomes cheaper they'll sell. The problem we have now is that the rents are too low (or interest rates too high).Interest rates are historically average – see here http://www.abilityfinance.com.au/home_loan_interest_rate_history.htm
harb wrote:If rents were never lower then the interest repayments on a property we wouldn't have a rental shortage then.No, we would have a rental affordability crisis.
A thread similar to this one is listed here
http://www.somersoft.com/forums/archive/index.php/t-33666.html
The only solution to the problem is decreasing asset values – we are just slow to catch up to the rest of the world but it has started in Australia.
Neg gearing review. Whatever, ill worry about that one when it actually happens. Plus with the amount of people using it there will either be a massive backlash as before or it will be modified so as not to affect people too much already using it. I personally believe with or without it will make know difference. The heard mentality will ensure we continue to have booms and busts. Nothing will change
As for asset deflation. Yers this is happening but as most expierianced investors say. This will not last forever. Sentiment will change, credit will free up and asset values will climb back to where they are now and a boom after that will see them climb up even more. This repeats over and over. Why the beliefe that this time is different. Sure the length and magnitude of the slump is hard to predict but the end result will be the same. Over and over again.
devo76 wrote:This will not last forever. Sentiment will change, credit will free up and asset values will climb back to where they are now and a boom after that will see them climb up even more. This repeats over and over. Why the beliefe that this time is different. Sure the length and magnitude of the slump is hard to predict but the end result will be the same. Over and over again.I have no belief it will be different in theory – just comparable to the recent boom in a similar fashion. Bigger boom = bigger bust. We should have had a minor correction in 2004-2005, instead the boom was forced to continue. That is the main difference this time round.
The important part from the other thread is here, one of the few studies on real house prices in Oz over the last 30 odd years – and this study doesn't take the second boom into account.
My properties are in NSW and we did not experience the second boom you mentioned. I hope this means we will suffer less in this downturn.
unmester,
Wow, what a report. Lots of theory a bit hard to understand, but very interesting.
Its interesting that it takes into account the house size increases and improvements to older houses in its calculations. I remember reading an article once about house price increases, it mentioned price of purchase and price at sale years later. It looked like he had cleaned up, but after the price of improvements, buy and sell charges, inflation etc was taken into account and then looking at investing his deposit and renting over the same period – he was worse off. But, off course its all relative to what is happening over those years with house prices and stock market, interest rates, taxation, your wages, etc etc.
In other words, there is no direct answer to what is the best strategy to increase your assetts, it depends on so many factors. Which is why if you try to get an answer from an investment adviser on what should I do to improve my position, they will tell you to fill in a 20 page document with all your details and then come in for an hour or so one on one interview.As for the original question about house price increases over 10 years. I think you can prove anything with statistics, its just a matter of what statistics you use, and whether you take into account inflation, taxation, other investments, running costs of property ( you don't have with shares ), personal interest in property ( do you worry about tenants, lack of tennants, etc – can you sleep at night ). For me. Its been a good ride, I'm happy.
WJ Hooker,
Yea, the maths in the report is at my limits of understanding. It's pretty complex.
I fully agree with adding to assets values. I believe a house with a pool, deck (well made), rumpus room (again well made), landscaped garden etc should be worth more and am prepared to pay more for any of those things.
What we have seen in recent years is asset values increasing by non-stable means, though. Quick renos inspired by TV shows preaching how to do it on the cheap and speculative value boosted by govt initiatives and record low interest rates. These are not sustainable.
Very likely that in the long term property will continue to double every 10 yrs or so.
The question is how long the current bearish period will be…
Michael Keating states in his blog entry of 24th January 2008:
– Australian property prices have averaged 10.4% growth over the last 120 yrs
– UK property prices have been recorded since the year 1088 and over those 920 yrs property prices have gained on average 10.2% per annumI do agree the property increases value as time passes by, but i've had always this thought that the cost of living etc increases aswell, u know what i mean, its like comparing different times.
Rav, I just thought I would point out some simple maths. It is possible to increase your net worth if your investment property simply follows inflation. Let's assume that inflation is at 4% and property prices are increasing at 4%pa. You borrowed 80k (interest only) to pay for an IP worth 100k 17.7 years ago, back in early 1990 . It takes 17.67 years to double at 4%pa, so your house is now worth 200k, but your loan is still at 80k. Your IP is still only worth 100k in 1990 dollars, but your loan is now worth only 40k in 1990 dollars. In today's dollars you now have an equity of 120k.
I've assumed inflation and growth rate stayed constant over 17 years, and I've ignored the balance of interest and expenses vs rent; I've simply showed the effect of inflation on equity. Rent should have at least increased with inflation, as would expenses, but interest stays constant (assuming a constant interest rate of course).ErikH wrote:Very likely that in the long term property will continue to double every 10 yrs or so. The question is how long the current bearish period will be… Michael Keating states in his blog entry of 24th January 2008: – Australian property prices have averaged 10.4% growth over the last 120 yrs – UK property prices have been recorded since the year 1088 and over those 920 yrs property prices have gained on average 10.2% per annumErikH, I'm extremely skeptical of any study that shows property increasing that much over such an extended period. I've seen other studies that show about 5-6% over the last 100 years for Australian property.
Let's look at the maths: 10.4% over 120 years is a factor of 143314.06. Can anyone tell what inflation has averaged over the last 120 years? I've had a bit of trouble finding a decent reference.
Assuming it was 5% gives a factor of 348.91which means a house now is 410 times more expensive than it was 120 years ago if the 10.4% growth is correct.
Even assuming inflation averaged 8% gives a factor of 10252.99 which means that a house is now 14 times more expensive. It just doesn't make sense that property can outstrip inflation by more than a percent or so over the very long term.StumpCam, I can understand your scepticism as these rates do seem high over the long term (I personally am a lot more conservative and aim for 7% over the longer term and that with selecting strong groth areas)
But if you take into acccount population growth both in AU and the UK and the fact that the average property of today offers a lot more than the average property of 50 or 100 years ago or even longer then why can't property outperform inflation by no more than 1%?
I don't have inflation data going back very far, but I don't think that inflation levels of 5% are representative for the much earlier periods in history…. hmmmm maybe that is why the growth was much higer and with inflation now more stabilized due to central bank intervention proeprty growth will also be more 'controlled'…?
I agree Erik that our population squeeze and level of industrialisation must equate to more expensive housing now. I just don't see how this increase relative to wages etc can continue indefinitely. Even 1% difference (property growth above inflation) means houses will be twice as expensive in today's dollars in 70 years time. 2% will make that happen in 35 years time.
Affordability must eventually become a governer in the balance of market forces.
duckster wrote:Rule of 70 . Divide 70 by the growth p/a to find out when investment doubles. So 70 / 7% p/a = 10 years but remember the longer the time period the more the average growth will be 7% p/aI thought it was the rule of 72,…. you divide 72 by the 10% return and it tells you how long it takes to double
I do agree with you stumpcam.
Cheers
Rav
ThePropertyDomainGday…. First time poster….. short time listener.
Also potential first home buyer.I think that one issue which will prevent a return to affordbility is our, what could be called 'strong immigration'.
We are currently looking in melbourne, and the majority of people looking at property are Chinese. These are in areas like caulfield, Malvern ect….. My partner is Chinese, so dont think this (overly) racist.
But the government lets well educated, and CASHED up immigrants into Australia, who can pay CASH for a home, then they tell their family what a great investment it is in Australia (Because in comparison to alot of Asia, property is relatively cheap), and they end up acting as an agent.
I wonder how much of our property is going overseas or to new immigrants while young Australians stay at home unitl they are 30?
I think that rather than a decrease in property, we are more likely to see hyper inflation and wage pressure which will bring wages in line with house prices, rather than vice versa.
Also, anyone think as the sharemarket looks more and more volatile Baby Boomers will turn to property with their super?
wallyt99,
How can Australian small businesses afford a hyper inflation in wages? For retail wages to increase, product prices have to increase and so on…
Chinese buyers may just be a Melbourne thing… not to be racist myself, but everytime I have been to Melbourne I have noticed that there are more asians compared to other cities.
Boomers are already heavilly invested in property, like the share market and their super. It's part of the current problem in the Western World, which is no-ones fault. There are more Boomers and they are probably going to live longer than any generation before them has. Therefore they have invested heavilly to fund thier own retirements (which makes sense) but in doing so have created an asset price bubble that is curently bursting.
All solutions other than a decrease in asset values seem unsustainable to me. The aged (older than boomers) currently can't aford the taxes on the value of thier lands but if the country increases the aged pension, then it will have to increase all other pensions and in doing so will create a situation where taxes and wages have to rise (otherwise it may end up being better on unemployment benifits than in entry level employment, like the aforementioned retail:)). Rises in taxes and wages will create inflationary pressure, which is exactly what the RBA is trying to curb, otherwise we go down Zimbabwe's path.
If the asset (primarlily property) bubble doesn't burst soon, there will be hell to pay in 10 to 15 years when all the boomers start selling en mass, downsizing or just spending the fruits of their investments. As it is I think we are going to see bigger percentage drops on bigger properties because pressure is already causing people to downsize. Always remember, 9% is the countries average long term interest rate.
You are right . The bubble must burst just as it has in the past. Then it will repair itself and start inflating again. Its part of the usual cycle. Its just the lenth and magnitude of the cycle that is unknown. Why in hell do people think this is sooooooo different from any other time. Sure the specifics are different but every event in the past had a huge following of peolpe who believed it was a world ending event( WAR, FAMINE, DESEASE,WAR ON TERROR, DOT COM). Whatever. Yet here we are again.Life will go on. Things will recover quicker than most realise then of we go again.
ummester wrote:Chinese buyers may just be a Melbourne thing… not to be racist myself, but everytime I have been to Melbourne I have noticed that there are more asians compared to other cities.
Not really, its the same in Perth. I've been to a few open houses in the $800K -$1,200k range recently and there is definitely some interest from Singaporeans looking for cheap investment / holiday homes.
Quote:Therefore they have invested heavilly to fund thier own retirements (which makes sense) but in doing so have created an asset price bubble that is curently bursting.
If the asset (primarlily property) bubble doesn't burst soon, there will be hell to pay in 10 to 15 years when all the boomers start selling en mass, downsizing or just spending the fruits of their investments.
So which one is it ?
Quote:As it is I think we are going to see bigger percentage drops on bigger properties because pressure is already causing people to downsize. Always remember, 9% is the countries average long term interest rate.Sorry to burst your bubble unmester but the fact is that interest is coming down and we won't see 9% for a very long time. If the crash did not happen with rates going up then there is FA chance of a crash with rates falling. (yes I know, the banks will not pass them on.
)
The percentage "drops" that you are talking about are mostly an illusion caused by the fact that a larger then average properties under $400k have been selling well (thanks to the higher rents) while the upper end stalled. Some who bought 2-3 years ago may not have been prepared for the many rate rises we had and had to sell at cost , a few repo's even below cost, but with rates falling that's mostly over. As I said before, unless a house sells for less then the previous selling prices there is no real price fall, we had the 0.xx% fall we had to have so I hope the bears enjoyed the property "crash" while it lasted . LOL
As interest rates continue to fall over the next 1-2 years and people start to upgrade once again you should see property prices returning to the average upwards trend. Or maybe you think that this time will be different ?BTW, what happened to all them mortgages resetting in September that were supposedly going to cause a property crash ?
Also potential first home buyer.
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