House Prices doubling every 7 to 10 years

[rastus2]

Are you serious

I once read that the UK is the only country in the world that have 900+ years of records of land price. By memory the average growth was something like 10.2 pa. I guess that a lot of thing had happened in almost a millenium War, boom, bust, pandemics, you name it and still people need a place to live. Will that ever change?

This is a joke right ? a wind up ?

That myth (10% average growth per year ) has been debunked on numerous times... in good periods, you might get it... in flat years you can forget it... and in bad years (aka our near/mid term) you are toast if you rely on it as a financial plan.

 

[pieman]

You guys are too aggressive in your defense of property as the ultimate investment class. Your beligerence prevents you from cooly analising the changes happening, today.

I recommend that you put your dislike of NR and his message to one side long enough to listen to the message he, TC and I are trying to get across: That just as the stock market is no longer trading on fundamentals, property can act the same. In fact if sentiment continues to turn as it is doing now, there will a rout in property of equal percentages to BHP. If you are geared up you will be in deep dodo.

Did Glen Stevens' plea to Australia not to talk down our economy for fear it will be self-fulfilling, worry you? It did me. The sceptic in me always doubts what "insiders" tell us. A desperate act by a desperate man.

Don't shoot me, I'm just the messenger.

property will come off some more but shares have now lost 50%+ in 6 months NOW and it looks like its broken through some support and will head lower. I'd rather rely on my 5% rent to pay the ever decreasing interest bill than to have to rely on Mr Blue Chip paying dividends like they did in the past, while the CEO's earn 13m+ per year. The thing about those co's, I have no influence over how much they can pay themselves, where as my flats I can add value and be "master of my own domain"...big difference.
btw how can that guy sleep at night while he earns 13m+ PA and the share price has halved and plan to sack several 000.

 

[lizzie]

in the good years you might get 10% a year for a couple of years, 40% a year for 1-2 boom years, and then 5 years of flat of negative growth. depends when you buy in, and where, as to whether you get the growth over 10 years.

also depends on what condition the property is in and what one can do to improve it's value. as an example, we bought really daggy ppor for $1mil. by the time we finish the reno's we will have spend around $150-200,000 ... but by the time we finish in 12 months time (taking time out for renting it out while we are away) value will have gone up to near on $2mil. hence our property will have increase in value by around 80% in 3 years.

rumpled elf is doing something similar on much smaller figures - but same % increase result.

but there are so many variables as to creating the doubling. if you just bought a brand new house in woop woop where no one really wants to live, then the chances of your house doubling in value is about zilch.

 

[FHB]

http://bubblepedia.net.au/tiki-index.php?page=House+Prices+Double+Every+X+Years

 

[Max Carnage]

in the good years you might get 10% a year for a couple of years, 40% a year for 1-2 boom years, and then 5 years of flat of negative growth. depends when you buy in, and where, as to whether you get the growth over 10 years.

Nowhere, no matter how good the area, can double every 7 years. Not without super high inflation (and consequently interest rates). Nowhere, not even the best of areas, has. A few came close, but only in areas where land was practically given away to settlers in the early days.

Imagine there is a house somewhere in Australia worth a hundred million dollars. I think that's more than the most expensive one, right? Well if it had doubled in price every seven years, it could have been bought for less than £6 in 1847. Now I don't remember what wages were back then, but I do know that a bunch of immigrants arrived in 1850 on a ship called The Sophia. The men were offered £12/yr to work as labourers and the women £8/yr to work as servants. Seems they would have been living large.

Now to great giveaways... Land in Adelaide was originally sold - or perhaps 'given away' - for the low, low price of £1/acre in the late 1930s. There was a catch of course! You had to at the same time purchase an additional 80 acres in the surrounding countryside - for a further £1/acre. This was actually a shitty scam to keep the little man down and ensure that only wealthy snobs could afford land in the future city of Adelaide...

Adelaide (CBD only, and only repeat sales) comes close to doubling every 7 years. And only because the scam made it look like prices were £1/acre when they were actually much higher. A few hundred metres away, not by a long shot. I have a map of the original subdivision of Melbourne, with prices. Not even the CBD has come close there.

Dr Albert Bartlett supposedly once said, "the greatest shortcoming of the human race has been its failure to understand the exponential function."

 

[Sunfish]

You're not listening Pieman!

So your property gives you a 5% return. Is that gross? Net of all expenses do you get 3%?

Did you know that BHP pays 5% fully franked each year, net of all expenses? You don't have to buy a stamp or make a phone call. You can go overseas on a sabbatical for years and the money will be in your bank when you get home. Did I mention that the company has a PE of four? That means that it makes 25% profit on your funds each year, in your name. The difference between the $5.40 earnings per share and the 94c dividend is retained as capital for the company to expand through growth or acquisitions. $4.50 on a $21 is over 20% cap gain after your dividend.

But the shares have dropped 50% you say. Note the past tense. They can't drop another $25 but if they go broke you can put your head between your legs and kiss your ring goodbye. The country is toast..... All of it! The bank will own your soul!

Here we come to the bit you refuse to listen to: There is absolutely no reason property can't follow shares down. The fundamentals you talk about are as fragile as the fundamentals of shares. Nobody is buying shares on fundamentals, they are selling on sentiment. Property owners can be driven by sentiment too.

Leverage magnifies both profits and losses. If sound companies lose another 20% (not impossible) then there will be no way property can escape the carnage. If they don't fall further than 5% the dividends will repay your loss in the first year. By then there should be a doubling in value in just a few years. If this improvement doesn't happen it could only be because of a deep recession. Property is not a good investment during a long recession.

This is not advice to buy shares in general or BHP in particular. I use them as a proxy for "the market", is all. My aim is to point out that the risks inherent in property are at least as great as they are in shares at today's prices.

 

[GreatPig]

Did you know that BHP pays 5% fully franked each year

I think the tense there should be "has paid". Past performance is no guarantee blah blah blah.

But I agree absolutely with your point about property.

GP

 

[Sunfish]

Their earnings are X5 dividends, unlike the banks, and they wouldn't dare cut that dividend. The earnings should be robust too because they either sell overseas or mine overseas so our low dollar should put billions strait onto the bottom line.

As the A$ was on the way up BHP was being discounted because every cent rise meant some billions less in our money. The reverse isn't happening in the price but it will show in results.

 

[Ausprop]

Their earnings are X5 dividends, unlike the banks, and they wouldn't dare cut that dividend. The earnings should be robust too because they either sell overseas or mine overseas so our low dollar should put billions strait onto the bottom line.

As the A$ was on the way up BHP was being discounted because every cent rise meant some billions less in our money. The reverse isn't happening in the price but it will show in results.

surely a risky investment then given the troubles the USD is likely to find itself in in the medium term?

 

[joe jo jo]

http://bubblepedia.net.au/tiki-index.php?page=House+Prices+Double+Every+X+Years

Good link FHB, been there a few times. Hence the reason we cant just look at the past to predict the future, instead we just need to make our own assessment of what we might expect to happen based on the information in front of us.

There is a risk with every single investment (BHP or property). If people cant accept the consequences of making the wrong decision, then they are not cut out for investing FULL STOP.

 

[Shadow]

Here we come to the bit you refuse to listen to: There is absolutely no reason property can't follow shares down. The fundamentals you talk about are as fragile as the fundamentals of shares. Nobody is buying shares on fundamentals, they are selling on sentiment. Property owners can be driven by sentiment too.

I'm sure this has been discussed before. Most (all?) shares are held by investors. Most property is not held by investors.

If I sell my house then I have nowhere to live, I've wasted my stamp duty and other buying costs, I need to get all my furniture moved, this is a serious inconvenience especially if married with kids, and I would have to find a rental property (not easy in today's tight rental market). Can I even find a suitable rental in my neighbourhood? Can my kids stay at the same school? What will the neighbours say? The shame, the terrible shame!

If I sell my shares... meh - I have no shares, big deal. I'll sell them.

That's the difference.

Cheers,

Shadow.

 

[RumpledElf]

That's the difference.

Not everyone has shares. Noone really *needs* shares, but virtually everyone needs property - whether they rent it, own it or owe the bank for it. It is very hard to dodge having something to do with property but really easy to have nothing to do with shares.

Which makes it even more weird just how much people are willing to pay for houses ...

 

[Token Funder]

I'm sure this has been discussed before. Most (all?) shares are held by investors. Most property is not held by investors.

If I sell my house then I have nowhere to live, I've wasted my stamp duty and other buying costs, I need to get all my furniture moved, this is a serious inconvenience especially if married with kids, and I would have to find a rental property (not easy in today's tight rental market). Can I even find a suitable rental in my neighbourhood? Can my kids stay at the same school? What will the neighbours say? The shame, the terrible shame!

If I sell my shares... meh - I have no shares, big deal. I'll sell them.

That's the difference.

Cheers,

Shadow.

If only you were in Japan/US/UK/Spain b4 their RE markets imploded...you could have explained why it can't happen

 

[Shadow]

If only you were in Japan/US/UK/Spain b4 their RE markets imploded...you could have explained why it can't happen

Notwithstanding the fact that property prices in those countries have not and will not fall by 50% (as per the suggestion in the original post) it should be noted that we are not the same as those countries. Japan for example had a much larger boom than us, and they also have a declining population.

Of course there is always potential for property prices to fall by 50% given the right conditions, but my comment was in response to Sunfish's suggestion that 'There is absolutely no reason property can't follow shares down.'. In fact there are fundamental reasons why this won't happen in Australia right now.

Oh but I suppose we're just like the US. And this is just like 1929. Or something.

Shadow.

 

[Shadow]

Noone really *needs* shares, but virtually everyone needs property - whether they rent it, own it or owe the bank for it. It is very hard to dodge having something to do with property but really easy to have nothing to do with shares.

Haha. I got banned from the other forum for saying stuff like that (in fact I used pretty much that exact wording on occassion!). Are you sure you're a true cphg'er. You should resign from your moderator position there forthwith!

 

[yieldmatters]

I'm sure this has been discussed before. Most (all?) shares are held by investors. Most property is not held by investors.

Trouble is Shadow that prices are set at the margin - the majority doesn't matter. The marginal seller will be a bunch of people with IPs that don't need them for their own personal shelter and have no reason not to sell them.

 

[Token Funder]

my comment was in response to Sunfish's suggestion that 'There is absolutely no reason property can't follow shares down.'. In fact there are fundamental reasons why this won't happen in Australia right now.

QUOTE]

Straw man.

I don't think Sunfish said "right now". He simply said, as you quoted, there is no reason property can't follow shares down.

Not so say they will, simply that there is no "magic" reason that precludes it.

To your comments, care to define "right now". Is at the time of posting, the next 12 months or over the course of the downturn we are experiencing/about to experience?

 

[Shadow]

To your comments, care to define "right now". Is at the time of posting, the next 12 months or over the course of the downturn we are experiencing/about to experience?

I don't believe the Australian median house price will fall 50% anytime within the next 6 years.

PS: please look up the definition of 'straw man'.

 

[Shadow]

Trouble is Shadow that prices are set at the margin - the majority doesn't matter. The marginal seller will be a bunch of people with IPs that don't need them for their own personal shelter and have no reason not to sell them.

Wrong. The majority does matter.

If one distressed vendor sells at a 50% loss, but 9 non-distressed vendors sell at current prices, then the median house price is not suddenly 50% lower.

The majority is the key. For example, in Sydney the total sales volume this year is much the same as last year and higher than the year before. Just because a couple of houses in Kellyville sold for a 40% reduction, this does not mean that the Sydney median is down 40%. Or even the Kellyville median. Or even the median of the street where those houses were located.

There were almost 80,000 properties sold in Sydney this year. How does a few distressed sales 'set prices at the margins?'

Sure we can all quote economics 101 catchphrases like 'prices are set at the margins'. But just see how far you get trying to buy a Sydney median house for a 40% discount just because a house in Kellyville sold for such a discount.

The reality is most people are not selling for a 40% discount. The majority does matter!

But we've been through this all before.

Oh and by the way - why would that 'bunch of people with IPs that don't need them for their own personal shelter' even consider selling a cashflow positive asset for a loss? Wouldn't they just take advantage of the income stream instead?

Shadow.

 

[yieldmatters]

Sure we can all quote economics 101 catchphrases like 'prices are set at the margins'. But just see how far you get trying to buy a Sydney median house for a 40% discount just because a house in Kellyville sold for such a discount.

The reality is most people are not selling for a 40% discount.

But we've been through this all before.

Oh and by the way - why would that 'bunch of people with IPs that don't need them for their own personal shelter' even consider selling a cashflow positive asset at a loss?

I can be very confident you haven't done economics 101 so I'm surprised you know what catchphrases exist in those textbooks.

The reality is most houses don't sell every month. Only a small percentage of the stock sells (hence "at the margin"). And they can easily be dominated by IP owners over a particular timeframe if there is a flood of sellers.

Why would they sell a cashflow positive asset at a loss? Possibly because they've levered up across the board and need the cash. But most likely because they've lost their job and it is the only way to turn the house into cash to see them through.