Demographia 2011

[hobo-jo]

Except to win votes?

You think the government ramped up housing stimulus to win votes? lol

"The short term stimulus was designed to encourage people who had already been saving for a home to bring forward their purchase and prevent the collapse of the housing market."
http://www.scribd.com/doc/35586562/First-Home-Saver-Accounts-FOI-Documents

Except that default and delinquincy rates are lower now than in 2008/09

Interest rates peaked higher in 2008 than we have now. I recall reading articles indicating they were higher in 2008, can you link me to where it shows they were higher in 2009 (than now)? Regardless they are currently trending up and unless you think the government is going to bring in the big guns to prevent another price collapse (which they may do) then we'll likely see higher delinquencies in 2011 than we saw in 2008.

Except that we have this funny called the property cycle.
As above, the property cycle.
Again, the property cycle
Again, the property cycle

Oh I agree. I just think we've seen the peak in a much larger property cycle than the usual one spouted on here that lasts 7-10 years. As they say, the bigger the boom, the bigger the bust.

Source: http://thedepression.org.au/?p=4202

And if you think the current rise in prices that we've seen is normal, perhaps you can tell us when in history (apart from the last 10 years):

Houses have been so over priced against rents?

Land has been so over priced against GDP?

Interest payments on mortgages have been such a high percent of income?

Houses have been such a high multiple of household or single incomes?

Can't name another time? Then perhaps you do agree that the largest boom we've ever seen will likely end with the biggest bust?

It's not that complicated

You're right, it's not that complicated to work out that house prices are over priced and due for a correction, but affordability is not as simple as mortgageman was trying to make it out to be.

 

[VYBerlinaV8]

You think the government ramped up housing stimulus to win votes? lol

"The short term stimulus was designed to encourage people who had already been saving for a home to bring forward their purchase and prevent the collapse of the housing market."
http://www.scribd.com/doc/35586562/First-Home-Saver-Accounts-FOI-Documents

Initially, the FHOG was clearly about the votes. It was ramped up as a stimulus. No argument there, but the ramping up was after it had already been around for years.

Interest rates peaked higher in 2008 than we have now. I recall reading articles indicating they were higher in 2008, can you link me to where it shows they were higher in 2009 (than now)? Regardless they are currently trending up and unless you think the government is going to bring in the big guns to prevent another price collapse (which they may do) then we'll likely see higher delinquencies in 2011 than we saw in 2008.

I thought I read it here somewhere. If I'm wrong about 2009, my point about 2008 still stands.

Oh I agree. I just think we've seen the peak in a much larger property cycle than the usual one spouted on here that lasts 7-10 years. As they say, the bigger the boom, the bigger the bust.

Source: http://thedepression.org.au/?p=4202

And if you think the current rise in prices that we've seen is normal, perhaps you can tell us when in history (apart from the last 10 years):

Houses have been so over priced against rents?

Land has been so over priced against GDP?

Interest payments on mortgages have been such a high percent of income?

Houses have been such a high multiple of household or single incomes?

Can't name another time? Then perhaps you do agree that the largest boom we've ever seen will likely end with the biggest bust?

We've definitely had a huge boom, I'm not sure why you think I'm suggesting otherwise. But it is still part of the property cycle. I think, though, that it is far more likely that we will see extended stagnation rather than a genuine bust. For the areas I invest in, there's way too much demand, and way too much money.

You're right, it's not that complicated to work out that house prices are over priced and due for a correction, but affordability is not as simple as mortgageman was trying to make it out to be.

Affordability is a very complex problem. I've argued on here previously that simply comparing income to price is not a particularly useful tool. Sure, price to income ratios have risen, but so has disposable income. Combine higher disposable income with leverage and voila - higher house prices. The real questions we should be asking are whether disposable incomes are changing, or likely to change, and what effect this has on different market segments.

For example, Canberra (where I invest) is very expensive right now. Good properties close to the city are very pricey. But match that to huge demand from well paid public servants, the Canberra IT contractor market and the Canberra government services sector, and you have HEAPS of money chasing these properties. For example, there are 25 year old guys doing IT support and development work pulling 6 figures easy, who can comfortably afford what was considered out of reach by most only ten years ago.

 

[hobo-jo]

Initially, the FHOG was clearly about the votes.

Are you talking initial introduction of the FHOG or the recent FHBB, FHSA, etc? As I recall the FHOG introduced in 2000 was to offset the GST and regardless is not relevant to the discussion we are having 10 years on and context of my comment. If you are claiming that the more recent stimulus packages were based on winning votes then I would be interested in hearing more about how you've come to this conclusion...

I thought I read it here somewhere. If I'm wrong about 2009, my point about 2008 still stands.

I'm not sure I understand what you're point about 2008 was... you simply stated that they are lower now than then, which I'm not disputing, but it is my opinion that without the introduction of additional FHB stimulus, changes to FIRB laws, RBA reducing rates, then we would have seen a much larger bust continue through 2009 and onwards. If you don't agree then I would be interested in your views on what drove the 2009-early 2010 mini boom. If you do agree I would be interested in your views on what the government/RBA will do to contain the situation this time...

For the areas I invest in, there's way too much demand, and way too much money.

What areas are they?

I've argued on here previously that simply comparing income to price is not a particularly useful tool. Sure, price to income ratios have risen, but so has disposable income. Combine higher disposable income with leverage and voila - higher house prices.

The chart I posted on the previous page is RPData's house price to disposable household income chart (although it doesn't specify that on the chart, you can see the full labeling HERE). It has still risen in real terms by as much as I've seen on any other income to price chart and nullifies any argument that rising 'disposable' incomes are to blame for higher prices. Prices have risen as a multiple of single incomes, household incomes and disposable incomes.... so the 'more women in the workforce', 'higher disposable incomes' and other such arguments just do not stack up in my opinion.

 

[mortgageman]

Quote:
Originally Posted by mortgageman
The whole point of my post was that the median house price does not tell you anything about the actual housing value, so why would it matter if they can afford the median property or not? The median property in New York may be a studio apartment and the median property in Melbourne may be a 3 bedroom house, so how can you compare the two and actually say that it tells you anything about housing affordability between the two cities?

If the average household can't afford to buy (or struggles to afford) the average house it questions who is going to continue buying at these prices? What happens if we get to a dangerous edge in affordability and rates start rising? Perhaps we see a crash in sales volume... what happens then if inventories continue to rise?

The median household is not the average household and the median house price is not the average house price. They are very different indicators. And it is very simplistic to analyse two markets based solely on either as they don't take into account the types of properties being purchased and demographic differences.

 

[charlieandkath]

I just read this whole thread and the only posts that made sense to me were mortgagemans. There are too many variables about all the above and to me the whole Demographia thing is a load of BS.

 

[Tony3008]

I wouldn't argue too much with your conclusion, but perhaps the median house price is not the appropriate one to use in this scenario - the 25% quartile price perhaps? Most people - in the absence of significant family help - have to start at the bottom and work up.

 

[Deltaberry]

If you look at that Demographia list, affordability is actually much more severe in Australia than any other English-speaking country / region on this planet (including Hong Kong). In fact I would argue that Hong Kong is one of the MOST affordable cities on that list.

Not only is Australia utterly and completely unaffordable on the price / income ratio. It is also crap on the actual cashflow level due to high interest rates and high transaction costs.

I demonstraetd to someone that it takes ~85% of an average Australian's household income to meet mortgage repayments on an average house in Sydney or Melbourne. The main killer is 7% effective interest rates - and guess what? Rates are only going to go up from here? In contrast, it only took 45% of a median Hong Kong household's income to meet repayments in a median house in Hong Kong due to a low 1.3% interest rates pegged at 2.5% at most banks.

If such a simple calc is not enough to demonstrate where the next crash is and how soon it's coming, I don't know what will. In the meantime when ratios revert back to a median of 5.0x, I'll look forward to buying houses from people with negative equity at half of today's prices

 

[charlieandkath]

If you look at that Demographia list, affordability is actually much more severe in Australia than any other English-speaking country / region on this planet (including Hong Kong). In fact I would argue that Hong Kong is one of the MOST affordable cities on that list.

Not only is Australia utterly and completely unaffordable on the price / income ratio. It is also crap on the actual cashflow level due to high interest rates and high transaction costs.

I demonstraetd to someone that it takes ~85% of an average Australian's household income to meet mortgage repayments on an average house in Sydney or Melbourne. The main killer is 7% effective interest rates - and guess what? Rates are only going to go up from here? In contrast, it only took 45% of a median Hong Kong household's income to meet repayments in a median house in Hong Kong due to a low 1.3% interest rates pegged at 2.5% at most banks.

If such a simple calc is not enough to demonstrate where the next crash is and how soon it's coming, I don't know what will. In the meantime when ratios revert back to a median of 5.0x, I'll look forward to buying houses from people with negative equity at half of today's prices

You'll be waiting a long time Deltaberry. As I said in a post on another thread the reason why we have high prices is because we are the luckiest country in the world. We have stable govt., we have massive resources, people want to live here, we have fantastic climate, I could go on and on and on. To put it into perspective Australia is like your Eastern Suburbs in Sydney and other countries are like your outer ring suburbs in the West of Sydney. Food for thought.

 

[oracle]

I demonstraetd to someone that it takes ~85% of an average Australian's household income to meet mortgage repayments on an average house in Sydney or Melbourne. The main killer is 7% effective interest rates - and guess what? Rates are only going to go up from here? In contrast, it only took 45% of a median Hong Kong household's income to meet repayments in a median house in Hong Kong due to a low 1.3% interest rates pegged at 2.5% at most banks.

Deltaberry, you keep forgetting the RBA has the flexibility to drop interest rates to 0.25% from current 4.75% (cash rate) which HK doesn't have. If interest rates are 1.3% than what is the cash rate?

You and I both know if RBA decided now to slash interest rates to the same levels as HK 1.3% property in Australia is going shoot up 30-40%, but we don't need that now, do we??

In relation to your stats regarding 45% of the median household income required to service mortgage on a median house, what is the homeownership rate in HK? Must be higher than 70% I guess??

Cheers,
Oracle.

 

[VYBerlinaV8]

Are you talking initial introduction of the FHOG or the recent FHBB, FHSA, etc? As I recall the FHOG introduced in 2000 was to offset the GST and regardless is not relevant to the discussion we are having 10 years on and context of my comment. If you are claiming that the more recent stimulus packages were based on winning votes then I would be interested in hearing more about how you've come to this conclusion...

My point was simply that the original FHOG was a vote buying exercise. We all know it was ramped up for stimulus. I suspect this is simply a miscommunication between us.

I'm not sure I understand what you're point about 2008 was... you simply stated that they are lower now than then, which I'm not disputing, but it is my opinion that without the introduction of additional FHB stimulus, changes to FIRB laws, RBA reducing rates, then we would have seen a much larger bust continue through 2009 and onwards. If you don't agree then I would be interested in your views on what drove the 2009-early 2010 mini boom. If you do agree I would be interested in your views on what the government/RBA will do to contain the situation this time...

There was originally a comment about rising delinquincy. I was making the point that delinquincy is lower than in recent history (and at a time when the market simply slowed a bit), so I don't think delinquincy is likely to jump much in the short term.

What areas are they?

Canberra and Queanbeyan. Shedload of demand and money chasing what supply there is.

The chart I posted on the previous page is RPData's house price to disposable household income chart (although it doesn't specify that on the chart, you can see the full labeling HERE). It has still risen in real terms by as much as I've seen on any other income to price chart and nullifies any argument that rising 'disposable' incomes are to blame for higher prices. Prices have risen as a multiple of single incomes, household incomes and disposable incomes.... so the 'more women in the workforce', 'higher disposable incomes' and other such arguments just do not stack up in my opinion.

Fair enough. I'm not arguing that housing isn't expensive. What I'm arguing is the nature of the 'bust'. Current housing prices are not a cause in themselves, but rather an effect. Simply put, people have more money than they used to, and can leverage that money further than they used to be able to. This adds up to higher prices. Until people have less money, or can't leverage as much, or both, things won't change a lot.

There are still high levels of demand in many areas, and people with money to spend. I expect a medium term stagnation to reduce prices in real terms over the coming years. I just don't see a genuine short term bust on this basis.

 

[hobo-jo]

We have stable govt.

LOL is that the same one that recently ousted the prime minster & then went to the polls with no clear winner?

we have massive resources

It's interesting, I'm currently reading this book and it's looking likely that this previous resource boom probably was one of the factors that caused the Australian housing bubble in the 1880s/90s. Our resources may be one of the reasons we boom, but then we bubble and bust.

we have fantastic climate

Yes great conditions here with 2 states flooded and the rest of country often in drought conditions.

 

[VYBerlinaV8]

Deltaberry, you keep forgetting the RBA has the flexibility to drop interest rates to 0.25% from current 4.75% (cash rate) which HK doesn't have. If interest rates are 1.3% than what is the cash rate?

You and I both know if RBA decided now to slash interest rates to the same levels as HK 1.3% property in Australia is going shoot up 30-40%, but we don't need that now, do we??

In relation to your stats regarding 45% of the median household income required to service mortgage on a median house, what is the homeownership rate in HK? Must be higher than 70% I guess??

Cheers,
Oracle.

The RBA must surely be hoping to slowly raise the rates back to the longer term average, simply to give them room to cut if we run into hassles.

 

[oracle]

Agreed.

And on that front HK should not be at the top of the list. Interest rates at 1.3% and capped at 2.5% at most banks for the next 3 years. Gross yield on properties are between 3.0-6.0%.

Not to mention cost of living is low. I had a very nice bowl of wonton noodles 2 months ago in HK for A$2.50. Better than most crap I find on the street here.

The reason why food is cheap in HK compared to Australia is what kind of wage safetynet do people in HK have? And even if there is one, how effectively has it been implemented. When you can get labour cheaply you can afford to sell products at a discount.

In Australia I know I can work in any restaurant/take-away place and expect to get a minimum hourly rate. Which if I am financially literate with good savings habit I can afford to buy a house and car. There is a minimum level of living standard everyone can expect when living in Australia, even when you are temporarily unemployed.

Delta, there is a very good reason why we have a long queue of immigrants waiting to come live here.

Cheers,
Oracle.

 

[Intrinsic_Value]

In Australia I know I can work in any restaurant/take-away place and expect to get a minimum hourly rate. Which if I am financially literate with good savings habit I can afford to buy a house and car. There is a minimum level of living standard everyone can expect when living in Australia, even when you are temporarily unemployed.


Cheers,
Oracle.

depends on the restaurant/take-away place. I have lots of friends who own businesses in this sector.
Going rate for some $8 per hour rising to $10 per hour for 'experienced staff'. (these are the asian ones).
Pizza shop: around $10 per hour.

The only ones paying the 'legal rates' are the very large ones, national chains and franchises. Of course demand is very high for these limited jobs.

 

[Deltaberry]

You'll be waiting a long time Deltaberry. As I said in a post on another thread the reason why we have high prices is because we are the luckiest country in the world. We have stable govt., we have massive resources, people want to live here, we have fantastic climate, I could go on and on and on. To put it into perspective Australia is like your Eastern Suburbs in Sydney and other countries are like your outer ring suburbs in the West of Sydney. Food for thought.

Haha come on that's not even economic analysis any more. When it takes between 75%-90% of an average household's income to service a property (dependong on your gearing), I find it a bit rich to call it a lucky country... Here's some real analysis for Melbourne:

Household Income: $63k
House: $600k
Deposit + Stamp Duty Required: $120k + $30k = $150k
Debt: $480k
Interest Per Annum @ Current Interest Rates: $33k
Repayment Per Annum (Over 30 Years): $16k
Total Interest + Repayment Required Per Annum: $49k
As A % of Household Income: 77%

The problem with a lot of posters here is they do ZERO economic analysis. If that's the quality of property investors, then brace yourselves for the crash. My analysis just demonstrated that for an average family that has saved $150k cash they would need to spend it all to buy an average house. And then they would need to fork out 77% of their GROSS INCOME per annum... leaving them with a miserable $10 to spend per week probably...

Deltaberry, you keep forgetting the RBA has the flexibility to drop interest rates to 0.25% from current 4.75% (cash rate) which HK doesn't have. If interest rates are 1.3% than what is the cash rate?

You and I both know if RBA decided now to slash interest rates to the same levels as HK 1.3% property in Australia is going shoot up 30-40%, but we don't need that now, do we??

In relation to your stats regarding 45% of the median household income required to service mortgage on a median house, what is the homeownership rate in HK? Must be higher than 70% I guess??

Cheers,
Oracle.

Oracle - the RBA doesn't have the LUXURY of just dropping interest rates like you said. It didn't drop interest rates when properties tanked in 1991. In fact it lifted interest rates... Interest rates are dictated by inflation as you would know, so I don't know how your argument is relevant to the HK Monetary Authority, whose cash rate is dictated by pegging itself to the US$. Instead of pegging to a currency, all the RBA is doing is pegging itself to inflation data points.

The reason why food is cheap in HK compared to Australia is what kind of wage safetynet do people in HK have? And even if there is one, how effectively has it been implemented. When you can get labour cheaply you can afford to sell products at a discount.

In Australia I know I can work in any restaurant/take-away place and expect to get a minimum hourly rate. Which if I am financially literate with good savings habit I can afford to buy a house and car. There is a minimum level of living standard everyone can expect when living in Australia, even when you are temporarily unemployed.

Delta, there is a very good reason why we have a long queue of immigrants waiting to come live here.

Cheers,
Oracle.

What's the reason again? To pay 77% of their household income onto a house? I know people are going to counter-argue and say BUT THEY CAN BUYS SOMETHING CHEAPER, like a $350k outer suburb house!

Well of course they can!! But a data point is just that, a data point. Even in cities where the Price / Income ratio is 5.0x, they can still buy something cheaper. Probably for 0.5x Price / Income ratio. The point about these surveys and my stats is to demonstrate that RELATIVELY SPEAKING, Australia is VERY VERY unaffordable.

 

[oracle]

Haha come on that's not even economic analysis any more. When it takes between 75%-90% of an average household's income to service a property (dependong on your gearing), I find it a bit rich to call it a lucky country... Here's some real analysis for Melbourne:

Household Income: $63k
House: $600k
Deposit + Stamp Duty Required: $120k + $30k = $150k
Debt: $480k
Interest Per Annum @ Current Interest Rates: $33k
Repayment Per Annum (Over 30 Years): $16k
Total Interest + Repayment Required Per Annum: $49k
As A % of Household Income: 77%

The problem with a lot of posters here is they do ZERO economic analysis. If that's the quality of property investors, then brace yourselves for the crash. My analysis just demonstrated that for an average family that has saved $150k cash they would need to spend it all to buy an average house. And then they would need to fork out 77% of their GROSS INCOME per annum... leaving them with a miserable $10 to spend per week probably...

Delta, you talk about economic analysis but you fail to recognise, someone on $63K is not going to get $500K loan. Secondly, your calculations fail to recognise that over 30yrs the person salary is going to increase and if he/she is making P&I payments over time payments can go down as significant chunk of Principal is paid off. May be you should talk to someone who has a paid off PPOR and get some lessons on economic analysis on how affordable mortgage payments gets over time.

Oracle - the RBA doesn't have the LUXURY of just dropping interest rates like you said. It didn't drop interest rates when properties tanked in 1991. In fact it lifted interest rates... Interest rates are dictated by inflation as you would know, so I don't know how your argument is relevant to the HK Monetary Authority, whose cash rate is dictated by pegging itself to the US$. Instead of pegging to a currency, all the RBA is doing is pegging itself to inflation data points.

Trust me Delta, when a housing crisis happens Inflation would be the last thing on RBA's mind. The examples you mention was from 20yrs ago, whereas I have living proof of how Central banks around the world react when there is housing crisis. Just have a look around at most of the developed nations and their interest rates. The only reason we have high interest rates currently is because we did NOT have a housing crash.

Cheers,
Oracle.

 

[charlieandkath]

LOL is that the same one that recently ousted the prime minster & then went to the polls with no clear winner?


It's interesting, I'm currently reading this book and it's looking likely that this previous resource boom probably was one of the factors that caused the Australian housing bubble in the 1880s/90s. Our resources may be one of the reasons we boom, but then we bubble and bust.


Yes great conditions here with 2 states flooded and the rest of country often in drought conditions.

Maybe you should live somewhere else if Australia's not good enough for you. Bet you wouldn't though.

 

[charlieandkath]

Haha come on that's not even economic analysis any more. When it takes between 75%-90% of an average household's income to service a property (dependong on your gearing), I find it a bit rich to call it a lucky country... Here's some real analysis for Melbourne:

Household Income: $63k
House: $600k
Deposit + Stamp Duty Required: $120k + $30k = $150k
Debt: $480k
Interest Per Annum @ Current Interest Rates: $33k
Repayment Per Annum (Over 30 Years): $16k
Total Interest + Repayment Required Per Annum: $49k
As A % of Household Income: 77%

The problem with a lot of posters here is they do ZERO economic analysis. If that's the quality of property investors, then brace yourselves for the crash. My analysis just demonstrated that for an average family that has saved $150k cash they would need to spend it all to buy an average house. And then they would need to fork out 77% of their GROSS INCOME per annum... leaving them with a miserable $10 to spend per week probably...

Deltaberry, do you own investment properties and a PPOR? If so you are not walking the talk. If not then you are fair dinkum and I for one would read your posts with a higher regard. Could you please answer that? Thankyou.

 

[hua_qiu]

Haha come on that's not even economic analysis any more. When it takes between 75%-90% of an average household's income to service a property (dependong on your gearing), I find it a bit rich to call it a lucky country... Here's some real analysis for Melbourne:

Household Income: $63k
House: $600k
Deposit + Stamp Duty Required: $120k + $30k = $150k
Debt: $480k
Interest Per Annum @ Current Interest Rates: $33k
Repayment Per Annum (Over 30 Years): $16k
Total Interest + Repayment Required Per Annum: $49k
As A % of Household Income: 77%

I think you had a major calculation mistake. The Repayment p.a. Should be the result of following excel formula

=PMT(33/480/12,30*12,480000,0)*12

Which is about 37,839 or 60% of income

 

[Tehanu]

Deltaberry, do you own investment properties and a PPOR? If so you are not walking the talk. If not then you are fair dinkum and I for one would read your posts with a higher regard. Could you please answer that? Thankyou.

Ugh. Hopefully this is not due to my (wrong) accusation. I would just like to reiterate that I was completely in the wrong.