Hi
I went yesterday to a presentation in Brisbane. Bill Zheng has modelled the contributory components of price growth for housing and the effect of each component on the price over the last 25 years. I thought I'd share some of his thoughts.
His conclusions were that real wage growth and real rent growth have contributed negligibly to the prices over that time. Based on real rental and wage data alone house prices were 25-40% overvalued. He modelled the effect of removing/adding in negative gearing and negative gearing's contributory effect was approx 11% over that time. He showed that removing negative gearing in fact would have lead to much higher rents and or a greater contribution from government toward public housing or rental assistance. Investors needed a minimum 6% rental yield with a 30% NG concession to make the investment in property worthwhile over this time period.
His models showed that 43 % of the nominal price growth was due to inflation. This was the major contributor. The next major contributor to growth was the increased ability and willingness of Owner Occupiers to pay more for a property. According to Bill Zheng, in 1984 people paid 38% of an average single gross wage gross wage in interest for a median priced property. The current value is about 64% of an average wage in interest for a median priced property. The reason that price was so affected by OO purchases rather than investors and negative gearing effects was that they controlled 70% of the finance for property so their willingness to spend more of their money as a percentage of income had a far greater effect on prices than the investor components. It's contributory effect on prices was 24% over the last 25 years.
During the last twenty five years we have had one tipping point of affordability in 1989/1990. At this point OO interest was 84% of average single wage in Australia at the time. It also occurred in the UK and their tipping point at that time was 120% of average wage.
Bill said that in the outer areas of cities (mortgage belts) that OO had already exceeded their capacity to pay and that was why property was falling in these areas atm. He expected greater falls in these areas especially if interest rates rise or unemployment rises as most or all of their discretionary income was gone with rising interest rates and inflation.
He felt that the inner affluent areas had more capacity for growth due to the higher wages and more discretionary income left after mortgage payments. He said there was no significant difference between the sizes of mortgages for inner and outer areas and that the affluence effect should keep the inner areas growing for another 1-3 years dependent upon no major global financial meltdown occurring.
For the investors,
Bill advised that we look for properties that
1. Have 40-70% land content
2. Are within 100-150% of median price for area
3. Have had 7-10% capital gain over the last 15 years
4. Are high demand properties in established areas. Avoid town of less than 5000 people.
5. Look for properties that we can add value to.
6. Avoid mortgage sensitive areas
7. Avoid non-standard properties (exotic or unusual)
8. Avoid low yield properties.
I thought that was pretty standard stuff but worth repeating.
He also said that using debt to meet lifestyle costs (LOE) was dangerous atm due to funding costs and a possible (death) spiral with debt.
He expected price growth in inner affluent areas to continue in line with inflation but outer areas could expect the bulk of price fall as people default. He expected real price growth (after inflation) to be flat over the next six to ten years.
If you can't make one of his seminars then it will be available on DVD after the seminar series is finished.
Hope this is useful.
Cheers
Shane
PS also posted on another thread but thought it may be missed there.
I went yesterday to a presentation in Brisbane. Bill Zheng has modelled the contributory components of price growth for housing and the effect of each component on the price over the last 25 years. I thought I'd share some of his thoughts.
His conclusions were that real wage growth and real rent growth have contributed negligibly to the prices over that time. Based on real rental and wage data alone house prices were 25-40% overvalued. He modelled the effect of removing/adding in negative gearing and negative gearing's contributory effect was approx 11% over that time. He showed that removing negative gearing in fact would have lead to much higher rents and or a greater contribution from government toward public housing or rental assistance. Investors needed a minimum 6% rental yield with a 30% NG concession to make the investment in property worthwhile over this time period.
His models showed that 43 % of the nominal price growth was due to inflation. This was the major contributor. The next major contributor to growth was the increased ability and willingness of Owner Occupiers to pay more for a property. According to Bill Zheng, in 1984 people paid 38% of an average single gross wage gross wage in interest for a median priced property. The current value is about 64% of an average wage in interest for a median priced property. The reason that price was so affected by OO purchases rather than investors and negative gearing effects was that they controlled 70% of the finance for property so their willingness to spend more of their money as a percentage of income had a far greater effect on prices than the investor components. It's contributory effect on prices was 24% over the last 25 years.
During the last twenty five years we have had one tipping point of affordability in 1989/1990. At this point OO interest was 84% of average single wage in Australia at the time. It also occurred in the UK and their tipping point at that time was 120% of average wage.
Bill said that in the outer areas of cities (mortgage belts) that OO had already exceeded their capacity to pay and that was why property was falling in these areas atm. He expected greater falls in these areas especially if interest rates rise or unemployment rises as most or all of their discretionary income was gone with rising interest rates and inflation.
He felt that the inner affluent areas had more capacity for growth due to the higher wages and more discretionary income left after mortgage payments. He said there was no significant difference between the sizes of mortgages for inner and outer areas and that the affluence effect should keep the inner areas growing for another 1-3 years dependent upon no major global financial meltdown occurring.
For the investors,
Bill advised that we look for properties that
1. Have 40-70% land content
2. Are within 100-150% of median price for area
3. Have had 7-10% capital gain over the last 15 years
4. Are high demand properties in established areas. Avoid town of less than 5000 people.
5. Look for properties that we can add value to.
6. Avoid mortgage sensitive areas
7. Avoid non-standard properties (exotic or unusual)
8. Avoid low yield properties.
I thought that was pretty standard stuff but worth repeating.
He also said that using debt to meet lifestyle costs (LOE) was dangerous atm due to funding costs and a possible (death) spiral with debt.
He expected price growth in inner affluent areas to continue in line with inflation but outer areas could expect the bulk of price fall as people default. He expected real price growth (after inflation) to be flat over the next six to ten years.
If you can't make one of his seminars then it will be available on DVD after the seminar series is finished.
Hope this is useful.
Cheers
Shane
PS also posted on another thread but thought it may be missed there.
