Why? Nothing other than that is the way the discussion led & that it is 100% relevant to the thread topic.
No, I do not need investors. I am simply "sharing" what I have "done" to show that some people back their sentiment with more than hot air.
A crash in property prices? Don't bet on it
- Thread starter Propertunity
- Start date
Why? Nothing other than that is the way the discussion led & that it is 100% relevant to the thread topic.
No, I do not need investors. I am simply "sharing" what I have "done" to show that some people back their sentiment with more than hot air.
Indifference alluded to an interesting point, that social and economic shifts have contributed to higher property prices. The thing is that there are three variables that have come into play in the last few decades:
The solution to VYBerlinaV8's conundrum is that at some point there is going to be a limit to what people can pay. The disappearance of FHBs is probably a sign of that, though over here investors have tended to step in.
In theory at this point, I'd expect prices to fall to a level where young people can afford to buy into the sort of area that they could realistically expect to live in. So a young professional might expect to be able to afford a one or two bedroom unit in an inner ring suburb.
(I'm ignoring the usual comment that they should reduce their expectations, and buy a tiny unit in a crime-ridden suburb that's two hours from the CBD.)
In practice, the market is doing something else.
- Increasing the length of mortgage terms. (Intergenerational or interest only.)
- Both adults working, rather than stay-at-home mothers
- Lower interest rates.
The solution to VYBerlinaV8's conundrum is that at some point there is going to be a limit to what people can pay. The disappearance of FHBs is probably a sign of that, though over here investors have tended to step in.
In theory at this point, I'd expect prices to fall to a level where young people can afford to buy into the sort of area that they could realistically expect to live in. So a young professional might expect to be able to afford a one or two bedroom unit in an inner ring suburb.
(I'm ignoring the usual comment that they should reduce their expectations, and buy a tiny unit in a crime-ridden suburb that's two hours from the CBD.
)In practice, the market is doing something else.
Indifference alluded to an interesting point, that social and economic shifts have contributed to higher property prices. The thing is that there are three variables that have come into play in the last few decades:
What's struck me (and I think Indifference too) is that the obvious changes are tapped out. The only thing that I could see coming along is either groups of friends or multiple generations of a family getting together to buy a property. The former isn't unheard of in the UK these days.
- Increasing the length of mortgage terms. (Intergenerational or interest only.)
- Both adults working, rather than stay-at-home mothers
- Lower interest rates.
The solution to VYBerlinaV8's conundrum is that at some point there is going to be a limit to what people can pay. The disappearance of FHBs is probably a sign of that, though over here investors have tended to step in.
In theory at this point, I'd expect prices to fall to a level where young people can afford to buy into the sort of area that they could realistically expect to live in. So a young professional might expect to be able to afford a one or two bedroom unit in an inner ring suburb.
(I'm ignoring the usual comment that they should reduce their expectations, and buy a tiny unit in a crime-ridden suburb that's two hours from the CBD.
In practice, the market is doing something else.
Definitely some interesting thoughts. One thing I've noticed in big cities around the world is the tendency to develop smaller dwellings. I wonder whether the slowly reducing average size will, over the years and decades, add a premium to dwellings that are larger? There's certainly a size factor in cost now.
Just some thoughts, feel free to pick apart...
I will pick it apart right now. Let's start with apartments - everyone knows that apartments are getting smaller and smaller. 15 years ago a 2 bedroom apartment was at least 76 sqm. Now a '2 bedroom' apartment can be 50 sqm. Why? Because developers get more $$$ per sqm the smaller the apartment is. A 50sqm apartment may sell for $500,000, while a 300 sqm penthouse may sell for $2.5m. Obviously the developer is going to opt for the smaller option to maximise profit - I would do exactly the same especially since people seem prepared to pay for it.
A point I have oft' made. If prices are to rise further you new money in the game. For mature businesses to grow they need to find new revenue streams. The perfect example of this is comparing Apple to Microsoft and their share prices reflect this. Without something new in the mix, house prices cannot boom again.
Aaron, I do not mean to be confrontational, but you did NOT pick apart VYBerlinaV8's post but rather added strong support. You articulated exactly what was being said..... Not sure what your angle is exactly, but apartments are definitely decreasing in size whilst increasing in cost.... exactly what was already stated.
To answer VYBerlina's question, I already see value in larger dwellings. Their rarity is increasing daily.... only time will tell though, but I definitely value the extra space quite highly.
Indifference alluded to an interesting point, that social and economic shifts have contributed to higher property prices. The thing is that there are three variables that have come into play in the last few decades:
What's struck me (and I think Indifference too) is that the obvious changes are tapped out. The only thing that I could see coming along is either groups of friends or multiple generations of a family getting together to buy a property. The former isn't unheard of in the UK these days.
- Increasing the length of mortgage terms. (Intergenerational or interest only.)
- Both adults working, rather than stay-at-home mothers
- Lower interest rates.
The solution to VYBerlinaV8's conundrum is that at some point there is going to be a limit to what people can pay. The disappearance of FHBs is probably a sign of that, though over here investors have tended to step in.
In theory at this point, I'd expect prices to fall to a level where young people can afford to buy into the sort of area that they could realistically expect to live in. So a young professional might expect to be able to afford a one or two bedroom unit in an inner ring suburb.
(I'm ignoring the usual comment that they should reduce their expectations, and buy a tiny unit in a crime-ridden suburb that's two hours from the CBD.
In practice, the market is doing something else.
A breath of pure fresh air.... you actually get it. I think we could have a very civil and engaging conversation. Kudos to you.
The real question lies in your final statement.... "the market is doing something else". What is the market really doing??? Look at where the "smart money" is...... think on the global macro level. What is really going on? What does it really mean & how can we mere mortals gain some benefit from all this uncertainty?
Millions faultered during the Great Depression, but a few realized an extraordinary wealth transfer..... How exactly did they achieve such success in the face of generational adversity? Therein lies a real clue to what the market is "really doing".... Seeking equilibrium. If you realize how this happens, you know where the smart money is.....
Indifference,
I think your central argument may have one flaw - but I am not sure whether it is major or minor. This being to do with the polarisation of wealth we are witnessing in the developed world.
You have argued that it is a mathematical impossibility for average house prices to continue to diverge from average incomes much further.
But perhaps average incomes just simply don't matter that much anymore?
What if house-ownership is becoming essentially the exclusive domain of the wealthy and the highest income earners keep getting relatively more wealthy compared to the average income earners?
Housing prices can still go up under such a scenario because it is high income earners alone who are competing with each other (and hence bidding up prices) for property. How far? Well, perhaps this is determined more by perceptions of capital gains prospects rather than by 'normal' considerations of yeild?
Is wealth polarising? I'm not sure to what degree it is in Australia, but I suspect we property investors are tentative proof that it is. It's an increasingly well-documented phenomenon in the USA, where in 1915 the richest 1% accounted for 15% of that nation's income, while today the richest 1% account for 24% of the nation's income.
So, house prices may be able to continually go up irrespective of their divergence from average incomes, simply because those on average incomes will be forced to rent while very high income earners may be able to tolerate very much lower yeilds (indeed heavily negative yeilds if capital gains prospects in a structurally-undersupplied building market are contemplated) than others.
Note: This is not an anti-PI rant, for those that might suspect a commie just jumped out from under a bed. I'm as pro-PI as they come, which is to say I do genuinely think that if you aren't investing in property (or other increasingly-valuable assets) your financial future is looking historically increasingly bleak.
I think your central argument may have one flaw - but I am not sure whether it is major or minor. This being to do with the polarisation of wealth we are witnessing in the developed world.
You have argued that it is a mathematical impossibility for average house prices to continue to diverge from average incomes much further.
But perhaps average incomes just simply don't matter that much anymore?
What if house-ownership is becoming essentially the exclusive domain of the wealthy and the highest income earners keep getting relatively more wealthy compared to the average income earners?
Housing prices can still go up under such a scenario because it is high income earners alone who are competing with each other (and hence bidding up prices) for property. How far? Well, perhaps this is determined more by perceptions of capital gains prospects rather than by 'normal' considerations of yeild?
Is wealth polarising? I'm not sure to what degree it is in Australia, but I suspect we property investors are tentative proof that it is. It's an increasingly well-documented phenomenon in the USA, where in 1915 the richest 1% accounted for 15% of that nation's income, while today the richest 1% account for 24% of the nation's income.
So, house prices may be able to continually go up irrespective of their divergence from average incomes, simply because those on average incomes will be forced to rent while very high income earners may be able to tolerate very much lower yeilds (indeed heavily negative yeilds if capital gains prospects in a structurally-undersupplied building market are contemplated) than others.
Note: This is not an anti-PI rant, for those that might suspect a commie just jumped out from under a bed. I'm as pro-PI as they come, which is to say I do genuinely think that if you aren't investing in property (or other increasingly-valuable assets) your financial future is looking historically increasingly bleak.
Last edited:
There will be more renters Mr. Belboa. We will follow parts of Europe in that regard. I had a thread started last year however, went away for a few days, and it was closed. I hit a nerve apparently.
** EDIT ** here's the thread that was locked:
http://www.somersoft.com/forums/showthread.php?t=61143
** EDIT ** here's the thread that was locked:
http://www.somersoft.com/forums/showthread.php?t=61143
Last edited:
The truth hurts....not your fault for stating the realities facing those who think they deserve a place amongst higher income producing others.
To the unaffordable brigade, please....go out and find something that you can afford....not where you prefer...build on that and progress up the property ladder like many here have done....it's that simple.
Make a start, give it a real hot go before regurgitating the same old grief that has gone on for generations now. The main diff being, years ago, no one bleeted out aloud...
Australian house prices have been rising in real terms for over 60 years, according to Stapledon's data. Now, this can't continue forever, but only because nothing can continue forever (the universe will eventually end).
It can continue indefinitely - meaning with no defined endpoint. As Belbo alluded to, median house prices can grow faster than median incomes indefinitely if the supply of houses becomes ever more concentrated into the hands of the wealthiest members of the population, with the remaining, less wealthy people, renting.
For example, if the population grows faster than the supply of housing, then even if average incomes don't rise at all, average house prices can keep on rising because the existing houses will gradually migrate into the hands of the wealthiest people.
In this sort of environment, the house price to income ratio for the people who own the houses would not be particularly high, but the house price to income ratio of the entire population would be very high.
I'm not necessarily saying this is my expectation. At some point the people would rise up, overthrow their government and demand lower population growth or greater supply of housing. So while the premise of house prices rising faster than incomes indefinitely is technically possible, realistically there will come a point were the population no longer stands for it.
People often look at the average house price to income ratio in Australia and claim this is too high, but that is partly because the denominator includes low-income people who don't own a house. The house price to income ratio for the people who actually own the houses is much lower, because we remove the less wealthy non-house-owing people from the denominator.
When there are enough wealthy people bidding against each other for a limited supply of housing, then the average house price to income ratio will easily keep rising. The fact that those houses are becoming less and less affordable for the less-wealthy people will not stop the prices rising, because there are enough wealthy people to keep on pushing up the price.
Of course, where there isn't a limited supply of housing relative to demand, those wealthy people won't need to bid against each other, and prices will stop rising, and maybe start falling.
It can continue indefinitely - meaning with no defined endpoint. As Belbo alluded to, median house prices can grow faster than median incomes indefinitely if the supply of houses becomes ever more concentrated into the hands of the wealthiest members of the population, with the remaining, less wealthy people, renting.
For example, if the population grows faster than the supply of housing, then even if average incomes don't rise at all, average house prices can keep on rising because the existing houses will gradually migrate into the hands of the wealthiest people.
In this sort of environment, the house price to income ratio for the people who own the houses would not be particularly high, but the house price to income ratio of the entire population would be very high.
I'm not necessarily saying this is my expectation. At some point the people would rise up, overthrow their government and demand lower population growth or greater supply of housing. So while the premise of house prices rising faster than incomes indefinitely is technically possible, realistically there will come a point were the population no longer stands for it.
People often look at the average house price to income ratio in Australia and claim this is too high, but that is partly because the denominator includes low-income people who don't own a house. The house price to income ratio for the people who actually own the houses is much lower, because we remove the less wealthy non-house-owing people from the denominator.
When there are enough wealthy people bidding against each other for a limited supply of housing, then the average house price to income ratio will easily keep rising. The fact that those houses are becoming less and less affordable for the less-wealthy people will not stop the prices rising, because there are enough wealthy people to keep on pushing up the price.
Of course, where there isn't a limited supply of housing relative to demand, those wealthy people won't need to bid against each other, and prices will stop rising, and maybe start falling.
The price to income ratio everywhere in the world includes low-income people who don't own a house so I'm not really sure how it's relevant to whether the average income/price ratio is too high in Australia vis a vis other countries.
I didn't mention anything about other countries.
Some people say the ratio in Australia 'should' be 3x and anything more than 3x is 'too high' so prices must 'revert to mean' and stuff like that.
They say things like 'the ratio can't keep rising because soon nobody will be able to afford a home'.
What they don't realise is that technically this ratio can keep on rising indefinitely, with people still able to afford homes, while the supply of housing becoming increasingly concentrated in the hands of the wealthiest people.
Three underlying factors come into play:
(a) as the population increases the underlying value of land increases (on a general principle, not area specific). Therefore the economic incentive to maximise productivity of that land increases over time (for example why we see subdivision)
(b) wages increase over time, generally by a combination of productivity and inflation, as those wages increase, competition forces prices up over time to the level where the marginal buyer equals the marginal seller (long term time frames here)
(c) as the gold bugs would attest, currency is a depreciating asset over time. Land is still fixed, therefore over time as the currency depreciates, land correspondently increases (again on a general principle).
Therefore property will still go up over the long term. The faster property prices rise above their intrinsic values, upon a correction, the longer it will take for the 'long term price appreciation' to occur. But it will occur.
All these other factors such as income to debt levels, income to property prices, are just timing issues. Just like shares use PE ratio's as some form of comparative valuation mechanism. They provide good general guidelines.
(a) as the population increases the underlying value of land increases (on a general principle, not area specific). Therefore the economic incentive to maximise productivity of that land increases over time (for example why we see subdivision)
(b) wages increase over time, generally by a combination of productivity and inflation, as those wages increase, competition forces prices up over time to the level where the marginal buyer equals the marginal seller (long term time frames here)
(c) as the gold bugs would attest, currency is a depreciating asset over time. Land is still fixed, therefore over time as the currency depreciates, land correspondently increases (again on a general principle).
Therefore property will still go up over the long term. The faster property prices rise above their intrinsic values, upon a correction, the longer it will take for the 'long term price appreciation' to occur. But it will occur.
All these other factors such as income to debt levels, income to property prices, are just timing issues. Just like shares use PE ratio's as some form of comparative valuation mechanism. They provide good general guidelines.
All these theories are great for prices to always rise and I hope they are true but they all sort of go out the window when you look at the USA for example. I guess even the US will see property values return to what they were and rise above one day, but when that could be is anyone's guess!
This sounds a bit like those theories you heard in the '90's about why tech stocks were different. If nothing else an increasing ratio of house to income would put pressure on yields and lower yields would encourage investors to look elsewhere (shares, bondes etc.) and that would put pressure on prices.
Exactly my thoughts. Yields are poor enough as it is for property. If prices keep rising, rents would need to rise commensurately to maintain even this level. Those people paying the rent are the "poor" ones who can't afford to buy with the average or less income who already pay a large portion of their income to feed the rent monster - where's this extra rent money going to come from?
And even if rents do rise in part sympathy, there'll be greater numbers who can't afford even the bottom end and the demand for public housing will escalate. The goverment is going to have to buy in at these higher prices and in greater numbers, which is going to significantly drain future budgets.
Finally, those increasing numbers of renters are also an increasing proportion of voters. Political parties would need to pay more than just lip service to affordability, lest the tribe will speak. Democracy could end up being be the final arbitrator.
Belbo - that is possible. It just means the market becomes more volatile because most buyers are investors and even traders (no, not tradies).
Social changes like this have happened in cities such as HK, Shanghai, Tokyo and history has demonstrated it translates to steep rises and steep falls.
Was at dinner the other night sitting next to a chief economist of a major bank. The person's point was spot on - the risk of default in Europe is small. Around 5-10%. Chances are the economy will power on and there will be a reasonable floor on Australian house prices.
But in the off chance - that 5% off chance - that things go wrong, it will go incredibly wrong. To test your mettle, if I told you there's a 5% chance you'll die tomorrow if you don't leave your city, would you stay or leave? While the chance of you dying is actually very small - only 5% - you'll probably still catch the first flight out tonight.
Same thing with what's happening in shares and properties right now. Chance of crash is actually very small - so small that if those were the odds of losing at a casino you'll gamble every day. But the risk is not small enough to ignore. And no one's buying anything in the next 18 months until all this rubbish is shorted. In the mean time, should expect more pains.
So no - the chief economist and myself don't have a crystal ball and can't tell you if things will or will not go incredibly wrong. Who knows right? We just have perspective.
If anything, I'm actually feeling a bit encouraged that the mess is Europe now has a lot of focus. It was always going to be a bit messy, and I'll be happier once we're through to the other side.
I'd have thought the next 2 years is when it will all play out.
I'd have thought the next 2 years is when it will all play out.
