The History of Australian property values

I've never considered interest rates as a driver of boom cycles. That can be seen in previous boom cycles where values still lifted above trend even though the cost of credit was exorbitant by historical standards. I've always considered rates as enablers not drivers. Globally govts relaxed fiscal policy and gave the banksters the green light to lend more. As property prices rose the trend became to access equity and leverage in order to gear up on property. The driver became a loop of equity access + equity increases rinse and repeat. Feeding the frenzy where spruikers that were thicker than fleas on a dogs back.

The primary reason for McKnight's success was this loop. Without this his ability to acquire properties would have been severely limited.  

The party never really got going until the late 90's. The big problem is that the 98 – 08 ramp in property prices was too high too fast. It simply out stripped the consumers ability to keep up. Since 10 the markets been flat and will stay so until credit capacity returns to the consumer. 

Credit volume (access limitations) and availability (price/rates) are no longer supporting property prices. The consumer has exhausted his/her credit capacity. What little capacity remains is being conserved while they figure out which way national and global economies will trend. 

Australia has remained stable and continued to grow albeit much more slowly however that growth came on the back of China's spending binge. Their capacity is now considerably limited. The next decade or so will more than likely see a reversion to the mean on average. Until a new driver of growth materialises economies aren't going to enjoy the boom conditions of the last 2 decades.

You could go to any city and find spots that are "doing well" as you say. You can also find spots that are doing the opposite. This is generally not useful information because by the time a suburb is doing well there's a good chance you've missed the boat and trying to front run hotspots is literally impossible.

The problem with this view is that it is time sensitive. It's all about now or what has just been. It doesn't help you figure out the likelihood of positions in say 5 years. Trends are also rearward looking and are at best a guide. 

So to me it's impractical to look at a suburb now that is appreciating and extrapolate from that the market in general is doing well and is likely to continue in this light. Unless there is a broad appreciation in the market of values greater than 5%pa I would have to surmise the market is experiencing some difficulty though albeit some suburbs are seeing reasonable growth.

That wealth was the equity increase due to price rises.

I think you're drawing the wrong conclusion here. While rates have been low on occasion they have not remained low for any great length of time. They may have been part of the over all trigger mechanism but they appear to have played no part in sustaining property price increases.

The following graph illustrates how much CG has been the contributing factor to wealth generation. If CG is a thing of the past at least in terms of being able to beat inflation and holding costs etc then one has to question how returns could be seen as reasonable given the trend in rental increases has not matched the level of funds in vested.

This illustrates the difficulty in finding cash flow positive properties when high gearing is employed. When return on capital invested is calculated it obvious that the returns are extremely poor.

While this looks at the traditional buy and hold investor its fairly obvious that investors are going to have to become considerably more sophisticated to scratch a return out of property for the foreseeable future.

Fixing would be based on an assumption rates are likely to rise. Not unreasonable given rates are at historic lows and there are precursors to a rate rise evolving in the wings.

Those precursors are primarily our ToT especially where resources are concerned. The currency wars developing across and between economies isn't helping the situation. The drivers are likely to be imported inflation as a result of CB QE and currency devaluation. If we get imported inflation as well as inflation from a downward currency movement I can't see that the RBA would have much choice but to raise rates. It's probably the single biggest fear that global QE will at some point unleash enough inflation to force rates up. 

The other side of the coin is the conditions attached to these types of loans. For that you really need one of the broker boys to give you the ducks guts on that.

Keep in mind what a rate rise might look like. 2% over 3 years might mean an average increase of around 0.7%pa over a 3 year term. 0.7% is going to cost you around $15/wk for every $100k in loans. 

There's pro's and cons to fixed versus floating. You would have to model it (best case worst case) to get a reasonable comparison and then fit that into your planning and overall strategy.

Generally speaking fixed is a bet on rising rates and floating a bet on stable to descending rates.

Of the graphs I found this one particularly interesting.

Strong falls in nominal land values have proven to be extremely destructive, especially when growth turns negative.

The worst on record was during the Great Depression, and the 1990s fall resulted in a recession and the worst financial

allout since the 1890s depression. It again dipped in 2009 due to the effects of the GFC, and is currently at the lowest

point in history bar the 1930s

This ties in with Mirvac (and Stockland) unloading poor performing land acquisitions. Click the graphic for full MB article.

Denise Brailey would disagree with you.

Toxic loans