Time series analysis is so difficult because everything is changing at the same time. I would like to see a "Beginner Home" vs "Beginner Home Wages" index over time. That would be telling.
Affordability calculator
- Thread starter peastman
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Time series analysis is so difficult because everything is changing at the same time. I would like to see a "Beginner Home" vs "Beginner Home Wages" index over time. That would be telling.
My spreadsheet at the top of this thread can do this. Just change the amounts at the top. It doesnt really make much differance, Percentages stay the same. As long as wages are not going up at the same rate as property, property will become les and less affordable. As it has for the last 50 years or so. If it continues, the gap gets bigger and bigger, making the whole thing unworkable.
As property investors, we need to be able to see past our own immediate needs and look at the broader picture. Sometimes it is easy to view investment opportunities only through our own personal circumstances.
For me personally, with children, a small house in the inner city would not be ideal. Children need space to move around. Confine them to a small area and they go 'stir crazy'.
People will move through various stages in their lives and require appropriate property to accommodate their life style:
The pattern could go something like this:
1) Young person in their 20's. Either live at home or rent a small flat in the inner city to be near lifestyle and educational facilities.
2) Person meets a partner - they move to a place of their own. Either a small place in the inner city area or further out.
3) Children enter the scene. With a first child it is possible to live in a small house for a while. (Until the child grows up a little).
4) First child grows up a little, and or couple have another child. The couple look for more family appropriate accommodation. Depending on income, they may move out of the city. In Melbourne, for example, they may move from Richmond to Balwyn. (Higher income people). For those on moderate incomes, they may need to move further afield.
5) Children grow up, parents look for lifestyle facilities once again. They may downsize in the area they have raised their family in, or move to the coast, inner city or bayside. (Classic Babyboomer behaviour).
Naturally there are a zillion other life circumstances that occur along the way. Divorce, separation, gay couples with high disposable income, peope upgrading, downsizing, renovating, moving to avoid renovation etc. etc. etc. I believe the pattern will continue.
In recent years Gen X have moved from the inner areas to suburbs further afield. This has been prevelant in Melbourne. Gen X have moved from the trendy inner suburbs (Carlton, Richmond and the like) to suburbs further out which have infrastructure in place which are more suited to children and family living. (ie. Schools, larger houses, transport links, etc).
Regards Jason.
Inner-inner city maybe. But the inner suburbs - I live 4 klms out of the Brisbane CBD - are pretty good for kids in my experience (I'm also a father). Smaller yard but plenty of parks and to stop them going stir crazy it actually forces you to take your kid out which is pretty good.
But I'm not talking hypothetical - I'm talking real time series data. I haven't seen it on "beginner houses". One decade's beginner houses are not the next decade's beginner houses.
edit: just to clarify what I mean - a house in Oxley or Mt Gravatt (I only know Brisbane) was probably a beginner house in it's time but not anymore. You have to go further out. So to track "beginner house" prices over time means you are measuring different houses over time which is difficult. The best proxy I thought of was to get time series data on house and land packages from a major developer / builder.
Hi all,
Peastman, in the outer burbs, it is still possible to buy 3 X 1 for ~$200,000, like this one in Cranbourne.
http://www.realestate.com.au/cgi-bi...r=&cc=&c=71316345&s=vic&snf=ras&tm=1214015498
Looking at an average 2nd year's teachers wage of ~$52,000, this is about 3.84 years wages.
A similar type of house that we bought in 1981, on the outer fringes at the time, for $44,000 was 3.52 times a second year teachers wage (my Wifes) ~$12,500.
The difference being that we were paying 14.5% interest compared to today 9.25%.
This all tells me that the same type of property goes up by inflation, but over time a given property goes up a little more as it gains a relatively better position.
bye
Peastman, in the outer burbs, it is still possible to buy 3 X 1 for ~$200,000, like this one in Cranbourne.
http://www.realestate.com.au/cgi-bi...r=&cc=&c=71316345&s=vic&snf=ras&tm=1214015498
Looking at an average 2nd year's teachers wage of ~$52,000, this is about 3.84 years wages.
A similar type of house that we bought in 1981, on the outer fringes at the time, for $44,000 was 3.52 times a second year teachers wage (my Wifes) ~$12,500.
The difference being that we were paying 14.5% interest compared to today 9.25%.
This all tells me that the same type of property goes up by inflation, but over time a given property goes up a little more as it gains a relatively better position.
bye
Multiple of wages is only one measure of many. Looks like that example is a little cheaper in 1981 (3.52 vs 3.84) but excludes other factors. The interest rate factor I'd take the opposite way (as usual with Bill and me). The 14.5% interest was in a time of high inflation so the real interest rate was probably more managable.
Hi YM,
Yes it was a time of high inflation, but there was no guarantee that it would continue. It is the same as now that none of us really know what the future will bring.
In terms of payments out of wages, then 14.5% is much more than 9.25%, and is what concerns people taking on a loan. Even your 'real interest rate' was probably higher in 1981 than it is now. Just looked up the historic RBA cpi figures.
When we bought property inflation 8.7% (annual basis) had come down from 10.8% a year before. This makes the 'real' interest rate of 14.5%-8.7%= 5.8%.
Currently 9.25%-4.2%= 5.05%.
The only difference that I can see of any consequence is that inflation is currently rising, where as in 1981 it had been falling.
There were just as many reasons in 1981 floating around as too why property was a bad investment as there are today. The Latin American debt was going to lead into another depression, housing was unaffordable, it now took 2 wages to get into property etc etc.
bye
Yes it was a time of high inflation, but there was no guarantee that it would continue. It is the same as now that none of us really know what the future will bring.
In terms of payments out of wages, then 14.5% is much more than 9.25%, and is what concerns people taking on a loan. Even your 'real interest rate' was probably higher in 1981 than it is now. Just looked up the historic RBA cpi figures.
When we bought property inflation 8.7% (annual basis) had come down from 10.8% a year before. This makes the 'real' interest rate of 14.5%-8.7%= 5.8%.
Currently 9.25%-4.2%= 5.05%.
The only difference that I can see of any consequence is that inflation is currently rising, where as in 1981 it had been falling.
There were just as many reasons in 1981 floating around as too why property was a bad investment as there are today. The Latin American debt was going to lead into another depression, housing was unaffordable, it now took 2 wages to get into property etc etc.
bye
Yes and no.
Although it starts off harder with 14% interest/9% CPI (versus 9% interest and 4% CPI), the rate at which it gets easier is better with higher inflation. This of course assumes that wages (rents if an IP) increases at the rate of CPI. Bracket creep has the effect of increasing tax paid, partially offset for the IP holder by the bigger tax refund.
There are two caveats:
1. Interest payments - are going to be higher if 14% than if 10%, and inflation makes zero difference at the time of purchase. It makes an increasing difference later on but for banks to approve you'll need the figures to stack up from day one.
2. Incomes, like rents and capital growth DO NOT necessarily even keep up with CPI. We had wage break-outs in 1974 and 1981 and the capital proportion of GDP shrunk. However capital regained its previous share in the decade following. Hence real wages during the 1980s 'Accord' era actually fell in some years (and they weren't necessarily recession years either). In contrast the last decade has seen a return to higher average wages growth, but without a break-out.
Hence basing continued serviceability on rising incomes can be nearly as foolish as plugging assumed high rates of capital growth into your spreadsheet to make grossly negatively geared IPs 'add up'.
Peter
You said the house was similar. But was the house you bought in 1981 and the house in the link the same just in terms of the physical structure or the same in all regards - i.e. the socio-economic flavour of the area, commuting time to work, infrastructure, parks etc. It's not just the physical structure that is the comparison.
The house in the link looks to be close to the bottom of what is available in Melbourne at the moment (putting flats aside). Pick what was close to the bottom of what was available in 1981 and ask if a second year teacher would have lived in it? I'd say probably not. Where would an unqualified basic labourer with a family been living if the teacher's were taking the bottom of the pile houses?
Bottom line for me is if I was a teacher and had to pay 3.84 times my salary for that place I would be 1) renting long term or 2) leaving the country.
Good points.
It is very hard to compare affordability at a point in time - it takes many years to pay off a house. And it is very hard to compare affordability over different generations - too many other things were different.
Right here:
http://www.realestate.com.au/cgi-bi...r=&cc=&c=88553354&s=vic&snf=rbs&tm=1214018851
It's similarly near the train and actually a lot closer to the CBD than Bill's 'teachers house'. Also 20 min drive to the beach, 5 min to a major 'main street' and 10 min to a major regional shopping centre.
Assuming $180k will buy it, and the applicants qualify for the (evil IMHO) $10k FHOG, we're down to just $170k + stamp duty etc.
Saving $20-30k in a couple of frugal years is doable, so the purchaser is now down to a loan of $150k.
It seems to me that some people (not necessarily you YM) believe they deserve or are entitled to buy a better starting home than the one Bill highlighted.
I personally don't see anything wrong in buying the house Bill has shown as a starter home. It would be easily affordable for a graduate teacher, and it would be possible to pay it off relatively quickly. The teacher could then 'upgrade' if so desired after he/she had paid it down.
I note that Bill has already mentioned that a beginning teacher (or second year teacher) would have been able to afford a similar standard house back in the 80's and, like now it was just over 3 times the teacher's wage. That is interesting Bill.
I find real life examples very useful. Keep them coming Bill!
Regards Jason.
Or, as was (maybe still is) typical, the teacher would have been transferred to various country schools in their early years. There they'd live in a subsidised GEHA house (WA) and could have used what they saved to buy at least 1 IP in each town they taught in.
http://www.nswtf.org.au/future_teachers/salary.html provides details of NSW starting teachers salaries. In 1989 they got about $24k pa. Experienced WA secondary teachers in 1986 got $30k approx, and my guess is they would have started at around $20k in that year.
In front of me is the 1989-90 Melbourne Home Guide which gives approx prices for suburbs.
Prices in many outer eastern suburbs were $80k in 1987 but nearer $120k in 1989, though you could also have got a small dive in Newport, Spotswood or Yarraville for that. But note that these are average prices and even the current media discussion (but not BillL!) misses the fact that reasonable choice starts at 50-70% of a city's median house price.
Now that would have been a smart move. Dr's need to travel around the countryside while they are in training. I wonder if any do buy a house at each place they work at? That would be a smart move too. Especially if they bought close to each hospital and then leased the house to the hospital for visiting medical staff to stay in....
The rest of the information you provided is interesting as well. Seems as though a teacher in 1989 on around $30,000 would have needed to have spent over 3x their annual wage to buy a house. All interesting information.
I googled around for house price historical data and found this for the UK market.
http://www.nationwide.co.uk/hpi/downloads/UK_house_prices_adjusted_for_inflation.xls
This is house prices adjusted for inflation and the really interesting thing is the overall trend. It shows that UK house prices have grown with a trend of 2.8% from 1975 to today. Another interesting thing about the chart in that sheet is, had you bought a house in 1989 and sold in 2001 you would have broken even!
Does anyone know of similar data for the Australian market?
Mike.
http://www.nationwide.co.uk/hpi/downloads/UK_house_prices_adjusted_for_inflation.xls
This is house prices adjusted for inflation and the really interesting thing is the overall trend. It shows that UK house prices have grown with a trend of 2.8% from 1975 to today. Another interesting thing about the chart in that sheet is, had you bought a house in 1989 and sold in 2001 you would have broken even!
Does anyone know of similar data for the Australian market?
Mike.
I googled around for house price historical data and found this for the UK market.
http://www.nationwide.co.uk/hpi/downloads/UK_house_prices_adjusted_for_inflation.xls
This is house prices adjusted for inflation and the really interesting thing is the overall trend. It shows that UK house prices have grown with a trend of 2.8% from 1975 to today. Another interesting thing about the chart in that sheet is, had you bought a house in 1989 and sold in 2001 you would have broken even!
Does anyone know of similar data for the Australian market?
Mike.
This is like when you talk to a finacial advisor (read: shares/mutual fund salesman). You can pick out any "window" of time and make it look whatever you want.
For example; had you used the same chart for Australia over the same period, ther may have been a similar result becuase of the early '90's slump, but then if you add the recent booms from 2000-2004, you get a totally different result.
The problem with any chart of this nature is it encompasses every sale in the country, but the window is small and very general.
Far too broad to get real accuracy in trends, except to say that in general, prices went up. I don't need a chart to tell me that.
A massive drop in high-end houses during bad economic times (which happens in that price-point whereas the lower-end fluctuate much less) will skew the figures.
I'd like to see the pattern of say, 20 specifically picked average houses, 20 high end houses and 20 lower end houses across a few different suburbs over the last 100 years - how often they sold and so on.
For example; my grandparents owned a house on Dandenong rd in St.Kilda when my mother was a girl. It was sold back then for around $8,000 from memory. It is still there.
Now it would be worth around $3 mill.
But was it of similar standard? The physical structure might have been. But back in 81 that structure was a modern house - now it is old. Further to that what about all the things outside of the structure - the community, the infrastructure, the travel time to work etc.
Was a graduate teacher in 81 buying the worst possible (or close to) realestate in the city? That is the question.
Paying it down and then upgrading is just extending the loan term - nothing more.
This is house prices adjusted for inflation and the really interesting thing is the overall trend. It shows that UK house prices have grown with a trend of 2.8% from 1975 to today. Another interesting thing about the chart in that sheet is, had you bought a house in 1989 and sold in 2001 you would have broken even!
That chart appears to assume that people paid cash for their properties.
When borrowing is factored in, analyses that involve comparing historical prices and correcting for inflation become invalid for the purposes of measuring total investment performance and the money made for the owner.
What many don't realise is that a certain amount of borrowing can actually REDUCE risk of poor performance relative to paying cash. If a property goes up by 2% pa then you naturally think you'd be better off with the money in a term deposit if you paid cash for it.
But if you borrowed 90% then that 2% gain is measured relative to the 10% put in, resulting in a very respectable 20% gain.
Hence a sluggishly appreciating but leveraged asset can still deliver excellent returns and internal rates of return.
But if its value drops then borrowing makes it worse rather than better.
If you think it more likely that the property value will rise by 2% than fall by 2%, then you borrow and enjoy excellent returns. If you think prices will fall, then be careful of borrowing as you could be worse off than paying cash. But at least the borrower (who could have bought outright) still has 90% of their cash left, so there's still a buffer and/or opportunity to invest elsewhere.
This table explains how the relative risks and returns of borrowing against asset performance.
Asset depreciates 10% pa | borrowing greatly magnifies your loss
Asset depreciates 2% pa | borrowing magnifies your loss
Asset appreciates 2% pa | borrowing magnifies your gain
Asset appreciates 10% pa | borrowing greatly magnifies your gain
Both cash buyers and borrowers gain greatly if the property rises by 20%. But when we consider more typical years (where the gain might be 2%), the borrower is still getting a 20% return, so the asset is still performing well for them.
This is shown below:
YEAR | %GROWTH | Cash buyer performance | Borrower buyer performance
Year 1 +10% | high | very high
Year 2 +2% | poor | high
Year 3 +1% | very poor | high
Year 4 -2% | poor | very poor
Year 5 +5% | fair | high
In other words apart from the negative year, the borrower outstrips the cash buyer, even (especially!) in fairly stagnant years. And you don't need a raging boom either for borrowing to work.
Then there's cashflow.
Provided the property was at least cashflow neutral over the entire period you hold it your total returns would be very much higher if you borrowed. The more sophisticated may wish to give appropriate consideration of current opportunity cost and discount of future gains.
In any event, continously maintaining LVR to a level that makes the portfolio is approximately CF neutral is prudent and low risk. Indeed given the large beneficial effects of leverage when growth is 0-5%, I regard this level of borrowing as lower total risk than if I'd paid cash.
In summary, the charts showing slow growth in values DO NOT demonstrate property is a bad asset to hold. Intelligent borrowing can magnify returns and actually lower risk, but only if the LVR is kept around that level to ensure the portfolio is CF neutral and largely self-supporting.
Peter
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