Logic Police Thread - the really DIFFICULT questions ...

[alexlee]

To boil my theory down: do incomes have to be connected to house prices? Yes. But what house prices? The price of a 3 bedder on a quarter acre block? Or a 2 bed unit? If the accepted 'average' home that should be affordable to ordinary people goes from a 3 bed house to a 2 bed unit to a studio to a closet, then every housing type CAN appreciate faster than incomes.

So for example, right now a 2 bed unit in Western Sydney is more than affordable to an ordinary income-earner. Why then do people say Sydney is not affordable? Because they still consider a house on a block of land within an hour of the city as 'something that should be affordable to ordinary people' (I really need a catchy term for this), and a 2 bed unit to be, well, beneath them. When people resign themselves to the idea that they can't afford a house, ever, then they'll consider units to be normal. In which cases incomes will again be connected to house prices, because the definition of 'house' has changed.

LA is a classic example of why land supply by itself won't hold prices down. LA is ONE BIG VALLEY!!! If you've ever been on a plane above LA you can see: the valley just stretches right into the horizon. There is plenty of land. Yet despite periodic falls (LA fell 20% over a few years in the early 90s, apparently) if you've held LA property over the long term you've done well. (Compton slumlord, anyone?) Why? Because as time goes by people consider 'normal' to be further and further away. LA is also unusual because it has no train and it doesn't really have a specific CBD. Every suburb has its own mini CBD.

Can this happen Australia wide? As long as economic and population growth continue long term, yes. I use Vancouver as an example of a city that really suffered medium term property DE-preciation in the 90s. Partly because prices were driven up by Chinese migrants, who returned to Hong Kong afterwards. i.e. in that case population actually FELL in the short-medium term, so property prices really did fall. Of course then Canada had a resource boom and everything reversed.

If Australia (or any other country) genuinely starts losing population, long term property prices may fall. Japan would be an interesting one to watch here.
Alex

 

[BoatBoy]

I do enjoy reading your posts Alex.

To me, those last 2 made perfect sense, and not just theory, but real life examples.

I also wish I could type that fast. That post would have taken me half the day to do (seriously)

Dave

 

[lizzie]

the example alex gave of "what is acceptable" is very true. friends of mine lived in hong kong on a small income. the unit they rented was so small that they had their kitchen set up on the stair landing outside their front door ... and to them it was perfectly acceptable and considered the norm.

hopefully australia will never get to that point - but affordability has to take a change of mindset for those that live in the city. there was an article recently in the local paper about lack of affordability in newcastle. out of curiosity i did a domain.com.au search and immediately found 600 properties in the immediate newcastle/lake macquarie area under $300k - of which over half were stand alone houses. don't bleat to me about affordability.

 

[Twitch]

Micro vs. Macro

Here's a brief example of micro market price movements. I've used 10 years as that is a long enough period to show a fundamental divergence in prices, rather than just timing factors where a neighbouring suburbs may take a year to catch up.

(Figures are from valuer general)

Melbourne Metro House p.a. increase from '96 to '06: 10.1% (131k to 342k)
Croydon North house p.a. increase from '96 to '06: 6.6% (181k to 348k)
Coburg East house p.a. increase from '96 to '06: 13.3% (114k to 396k)

So, micro markets matter in the short term, that's a given. The figures above show they also can matter long term.

 

[yieldmatters]

Hong Kong, Tokyo, Manhattan ...... um .... Australia. Major difference is we have more land than you could ever use - even if you exclude the desert - just stick to the coast and you would have 8 times Japan's space at least.

Eventually too, even Hong Kong, Manhattan, Tokyo have a limit because it will get to the point where people will no longer migrate there. Big house in country Japan with low paying job OR small shoebox in Tokyo with high paying job - there is an equilibrium here that is hit and then Tokyo can't grow in price anymore (or people can't live in anything smaller). On a side note I'd encourage you to check convenient locations in Tokyo (e.g. 10 mins from Shibuya) for a free standing house price vs inner city Sydney at the moment (it makes Sydney look ridiculous).

So, yes, if the state governments continue to maintain their artificial land shortage then prices could rise for a while but not forever - even if they maintain their policy then prices will only rise to a new equilibrium - i.e. living in 1m2 for $1M a year is still impossible - people just won't come to the city - they don't have the money. And if it is a shortage of space at the moment that is the issue what is going on with rents? They are STILL cheap, cheap, cheap. So this doesn't explain the "prices will rise forever" position either.

Alex's other point though in an earlier post about greater population means a particular area can attract more money (e.g. top 5% of incomes rather than top 10%) makes perfect sense even without land shortages. I think its a good point. However, it is micro.

 

[feihong]

If Australia (or any other country) genuinely starts losing population, long term property prices may fall. Japan would be an interesting one to watch here.
Alex

Alex:

I am indeed puzzled by Japan's RE behaviour. Their commercial properties have started moving a little 2 yrs ago I think, due to foreign investments such as Babcock and Brown Fund. However, as for residential properties, it really does surprise me on the length of time which RE remains stagnant. From investment point of view, it could be a paradox here; As long as BoJ keeps interest rate on hold, carry trade will continue, which encourages the outflow of Japanese Yen and discourages domestic inflation (Japan is still in deflation apparently..), and if BoJ rises interest by 1-2%, that could be enough to kickstart an inflation and get the investor back into the market?? From FHOG point of view, I wonder if it's those spoilt gen x/y rats (single parasites) who refused to buy a house and just kept living with parents that contributes to the lack of interest in housing? I just didn't feel "buying a house" was such a big item on the agenda amongst japanese people when I was there..

 

[yieldmatters]

In short the story put forward is this.
* Population will grow.
* The governments will maintain their artificial land shortage.
* People's incomes are limited (and debt is limited) so they will have no choice but to live in smaller and smaller homes. Eventually our major cities will begin to look like Hong Kong, Manhattan, Tokyo etc ...
* Therefore if you own land now in the major cities the price will rise beyond incomes. Your CG will be good.

I understand the argument and am really happy somebody had a go at it. But I don't buy it long term for these reasons:

On the demand side people will begin to move to regional Australia for a low paying job before they will accept a shoebox in inner city Brisbane - they will move to Warwick or Toowoomba. Especially families. And industry will follow them as they need the workers under $80K a year! Or for those who can they will move overseas. The only reason people are accepting these prices for the moment is cheap interest rates - it has allowed them to borrow and pay the asking price - but the era of easy credit is drying up. Once it hits their actual incomes they will make decisions and living in a shoebox in Australia won't happen.

On the supply side I think the government will cave in and begin to release land (without ridiculous levies) and improve infrustructure. The political pressure of people being offered shoeboxes for an average wage (and handing over enormous amounts of wealth to the generation before them for the privelage of doing so) will be enormous. The government will cave.

 

[alexlee]

I am indeed puzzled by Japan's RE behaviour. Their commercial properties have started moving a little 2 yrs ago I think, due to foreign investments such as Babcock and Brown Fund. However, as for residential properties, it really does surprise me on the length of time which RE remains stagnant. From investment point of view, it could be a paradox here; As long as BoJ keeps interest rate on hold, carry trade will continue, which encourages the outflow of Japanese Yen and discourages domestic inflation (Japan is still in deflation apparently..), and if BoJ rises interest by 1-2%, that could be enough to kickstart an inflation and get the investor back into the market?? From FHOG point of view, I wonder if it's those spoilt gen x/y rats (single parasites) who refused to buy a house and just kept living with parents that contributes to the lack of interest in housing? I just didn't feel "buying a house" was such a big item on the agenda amongst japanese people when I was there..

Japan is one of those situations that falls off the edges of text books, really. There are plenty of reasons why Japan’s market is so weird. Demographics. Just how huge the bubble was at the peak. Government actions after the bubble burst.

The problem is that if the BoJ raises rates (as it says it wants to do) the yen will appreciate as the carry trade contracts. That will affect Japanese exporters, and with consumer spending still anaemic (partly because Japan never took the pain of a sharp recession to shake out the excess capacity: underutilised employees simply don’t have the confidence to spend big), it runs the risk of going into recession again. Also the BoJ is not independent of the LDP, unlike the Fed or RBA. Fukuda is about the safest conservative choice you can get as PM, so I don’t see him putting in any major reforms.

From the FHB point of view, anecdotal evidence suggests that young women, for example, are buying their own PPORs. But generally there’s a perception that since property prices have been falling for 20 years, why buy when it might fall further? Demographics means that rents aren’t spiking up (which is what I think eventually will spark Australia’s next boom). The culture is also a factor: the Japanese don’t have a concept of ‘you should move out when you become an adult’. I have some friends whose parents blew up the old house, built a duplex and have their firstborn’s family live next to them.
Alex

 

[yieldmatters]

O.K, let's agree that some micro markets will be affected partially for the sake of the argument.

A property costing $100k in micro market A goes up in value by 100% over 4 years (above historical trend) because of new infrastructure and amenities, employment, affordability etc.

During this time, the Macro market is plodding along with little growth after a recent boom. In the same 4 years, average growth has been only 3% per year (under historical trend).

Then, there is an interest rate spike in year 4. Everyone stops buying, no-one can sell and macro prices drop by 30%.

The micro market A property is now only worth $140k, an increase of 40% or 10% per year since purchase until the correction, while the macro market has gone backwards by 18% nett since the beginning of our 4 year study.

So, they are definitley connected Yield, but the rates are very different.

But, as I've said already, there are micro areas that won't even be affected by all this, save a massive rate rise that cuts out all but the very cashed up buyers.

This is what I/we have been trying to tell you all along. It is very do-able and only requires the research to find the area, find the right location in the area, and find the right property in that location.

Your knowledge of investing is a great hedge against loss, and/or maximising returns.

So, rather than choose to not invest because all the lights aren't green, improve the knowledge to improve the safety, and then take action. Every day is the right time to buy if you can afford it.

Prices are not going down in the long term, and they only go down for those who need to sell at the wrong time.

I agree - if you pick a particular area and things fall your way (i.e. new infrustructure or some other reason) then you might do well regardless of the macro environment because your gain has been so big at the micro level the macro impacts become minor (as your illustration pointed out).

But its a different story to the "you can't lose on property - prices rise forever" story. I object to that story because its simply not logical.

 

[feihong]

and perhaps to add to that complication is the fact that Japanese government is effectively powerless. Many ppl's social welfare are being provided by kabushikikaisha, not by government, and often it's the directors of these kabushikikaisha that has the final say in politics, not politicians themselves. Koizumi wanted to do something, but is seriously hampered by the government organisation's own power.

 

[alexlee]

and perhaps to add to that complication is the fact that Japanese government is effectively powerless. Many ppl's social welfare are being provided by kabushikikaisha, not by government, and often it's the directors of these kabushikikaisha that has the final say in politics, not politicians themselves. Koizumi wanted to do something, but is seriously hampered by the government organisation's own power.

The relationship between corporate and bureaucrats is well known. The system of amakudari (retired bureaucrats parachuting into high paying corporate jobs after retirement) means the govt is unlikely to do anything to tick off the companies.

The whole Japanese system is to maintain the status quo.
Alex
Alex

 

[BayView]

I agree - if you pick a particular area and things fall your way (i.e. new infrustructure or some other reason) then you might do well regardless of the macro environment because your gain has been so big at the micro level the macro impacts become minor (as your illustration pointed out).

But its a different story to the "you can't lose on property - prices rise forever" story. I object to that story because its simply not logical.

That's why you are still sitting on your cheque book; it all has to be logical.

To me; the stock market isn't logical, but people stil keep pouring money in.
They are making money in it and I'm not.

But that doesn't mean I won't buy stocks; it just means that I don't have the knowledge to play the market - yet. When I do learn, I'll be movin' in.

With the "can't lose on property" comment; as I've illustrated before to you Yield, if you buy average priced, average suburb, average everything (maybe a good location is a recommendation) property that the average person would be able to buy (affordability) or would like to and be able to afford to rent, and buy it any time you can afford to buy, and if you buy it with a good amount of safety in terms of LVR and debt to income ratio so you don't have to sell, then you won't lose.

This is without even trying to maximise all the factors. Once you learn how to do that, then I would dare say that it is impossible to lose.

 

[JIT]

Micro-markets!

I understand the argument and am really happy somebody had a go at it. But I don't buy it long term for these reasons:

On the demand side people will begin to move to regional Australia for a low paying job before they will accept a shoebox in inner city Brisbane - they will move to Warwick or Toowoomba. Especially families. And industry will follow them as they need the workers under $80K a year! Or for those who can they will move overseas. The only reason people are accepting these prices for the moment is cheap interest rates - it has allowed them to borrow and pay the asking price - but the era of easy credit is drying up. Once it hits their actual incomes they will make decisions and living in a shoebox in Australia won't happen.

Right, so then at this future point in time regional Australian micro-markets may do better!

At the moment there is still significant demand for properties with close proximity to the CBD and medium-density living.

There's also demand for living close to water, close to 'trees', etc. etc...

Varying levels of demand for each.

At some point, the demand level may be greater for properties in regional towns, and at this time, this may be the more profitable micro-market for investors.

Piece of cake isn't it?

On the supply side I think the government will cave in and begin to release land (without ridiculous levies) and improve infrustructure. The political pressure of people being offered shoeboxes for an average wage (and handing over enormous amounts of wealth to the generation before them for the privelage of doing so) will be enormous. The government will cave.

So those people holding property in these micro-markets may start to do better here then as infrastructure improves!

But its a different story to the "you can't lose on property - prices rise forever" story. I object to that story because its simply not logical.

Why do you keep going back to this silly line?!

This is a very broad, generic and unqualified statement.

Not sure who you're quoting, maybe it's one of the morons on GHPC or PI.com, but I doubt serious investors here would flatly agree with something so ridiculous.

There's plenty of ways you CAN lose money in property!

Eg. by selling at the wrong time .

Prices in some micro-markets might go nowhere or downwards for a long, long time...or even ''forever".

I could pick several micro-markets I wouldn't go near...EVER

None of this macro BS makes any difference to serious real life investors making money out of property in selected micro-markets, even if they all have some magical 'connection' to each other!

As it stands I think you've agreed with almost everything we've said here, short of admitting you're wrong, and that the 'really difficult' questions aren't that difficult to answer at all!

 

[feihong]

The relationship between corporate and bureaucrats is well known. The system of amakudari (retired bureaucrats parachuting into high paying corporate jobs after retirement) means the govt is unlikely to do anything to tick off the companies.

The whole Japanese system is to maintain the status quo.
Alex
Alex

Thanks for the new word Alex! Sora kara furu, hahahaha.. yappari nihon no seijika na.. kotoba ni naranai!

 

[yieldmatters]

but I doubt serious investors here would flatly agree with something so ridiculous.

thank god ... somebody has said it.

 

[alexlee]

I understand the argument and am really happy somebody had a go at it. But I don't buy it long term for these reasons:

On the demand side people will begin to move to regional Australia for a low paying job before they will accept a shoebox in inner city Brisbane - they will move to Warwick or Toowoomba. Especially families. And industry will follow them as they need the workers under $80K a year! Or for those who can they will move overseas. The only reason people are accepting these prices for the moment is cheap interest rates - it has allowed them to borrow and pay the asking price - but the era of easy credit is drying up. Once it hits their actual incomes they will make decisions and living in a shoebox in Australia won't happen.

Australians won't live in shoeboxes in the cities when houses get too expensive? Americans and Brits (and Chinese, and Japanese, and most other cultures) are doing it. What makes us so special? Go see how families live in Hong Kong, London, Tokyo...... People go where there are jobs, not the other way around.

Mind you, YM, you don't think first home buyers would ever live out in Blacktown either. Aren't we lucky you don't represent the norm.

If you think people will move into the country and overseas to avoid downsizing their accomodation type, you're ignoring the evidence in EVERY major city in the world.
Alex

 

[JIT]

thank god ... somebody has said it.

So are we on the same page yet?

Do you see the LOGIC that is plain and simple to the serious and experienced residential property investors here?

If so, when and where will you be looking to buy your next property?

 

[DavidMc]

You put it so eloquently Alex. Much nicer than I have. We appreciate the time you take and kudos to you.

I tried but mine wasn't as nice as yours.

http://www.somersoft.com/forums/showpost.php?p=331414&postcount=6 (hmmm post 6 of how many?)
http://www.somersoft.com/forums/showpost.php?p=331452&postcount=8

I've even asked YM directly why he thinks the .au situation cannot eventually be like it is in other countries. Twice.

http://www.somersoft.com/forums/showthread.php?p=336809#post336809
http://www.somersoft.com/forums/showthread.php?p=338028#post338028

He has failed to respond until just recently and I don't think it's a satisfactory answer (see below).

I can hear that merry go round music again!

So this doesn't explain the "prices will rise forever" position either.

The argument isn't 'prices will rise forever'. The argument is 'there is still plenty to go yet, past longer than any of us are going to care'.

On the demand side people will begin to move to regional Australia for a low paying job before they will accept a shoebox in inner city Brisbane - they will move to Warwick or Toowoomba.

WARNING: BS ALERT! The opposite has been happening and has happened elsewhere. The net effect has been people choosing smaller accommodation closer over bigger accommodation further out. Go talk to your mate FireFly and read what he said about my suggestion to move to the country for a better lifestyle and better dwelling (which is what my family did back when Mr T used to wear red turtle necks and blue overalls). Don't give me no jibber jabber!

 

[alexlee]

Uh, can anyone suggest a city, ANY city, that has seen the process YM suggests will happen? i.e. people deciding housing is too expensive, so they move into the countryside or overseas, TO THE POINT where housing prices in the 'main' city actually falls?

Sure tons of people move out London into Kent, or from Manhattan to Queens. That allows people to have nicer places further from the city, but it sure hasn't crimped prices in London or on Manhattan!

Urbanisation isn't going to stop. It might be just prejudice but do you really see so many city born and bred people moving to the bush?

If people were really that logical, shouldn't all our retirees have moved to Thailand by now?
Alex

 

[BayView]

Australians won't live in shoeboxes in the cities when houses get too expensive? Americans and Brits (and Chinese, and Japanese, and most other cultures) are doing it. What makes us so special? Go see how families live in Hong Kong, London, Tokyo...... People go where there are jobs, not the other way around.

Mind you, YM, you don't think first home buyers would ever live out in Blacktown either. Aren't we lucky you don't represent the norm.

If you think people will move into the country and overseas to avoid downsizing their accomodation type, you're ignoring the evidence in EVERY major city in the world.
Alex

Exactly Alex,

and here's another true L.A story to bore you all that proves that point;

We were living in the mid-wilshire area; about 2 miles EAST of Beverly Hills, and 2 miles SOUTH of Hollywood blvd.

A Korean lady moved into our complex with her 2 year old daughter and mother. She worked 5 mins away by car (In L.A that is about 50 yrds).

I asked her; "where did you move from?"

She said" Riverside" (this is a 2.5 hour drive East of where we lived). It is a largish satellite town in the desert almost. It's bloody hot out there.

I then said "Why were you living out there?", to which she answered; "It's the only place I could afford to buy a house".

Of course; it all got too much for her; the 5 hours drive EVERY day and being a single mum with only the Grandmother to look after the daughter.

But, she WAS doing it for a few years.