No House Price Growth for 350 Years

[Sustainability]

I have already said in other threads (see below) that I think a crash is coming, just not yet! So please don't suggest that I think prices will 'boom forever'. I don't think this. I do think they will rise for a bit longer though.

My apologies Shadow, I didn't read your other posts. I wish you all the best.

I see data released today that the medium house price in Perth has fallen 10% since December. There's reports that some parts of Western Sydney has fallen 30% and with the RP Data Rismark Index in August (before the recent Financial Market doom and gloom) showing house prices down in every state and territory, I consider the peak of the Australian Housing Bubble has passed and gone.

I think the past two weeks doom and gloom is just putting the knife in and turning it. It's amazing the amount of people in the street saying house prices will fall 40%. Two weeks ago, it would of been unheard off. It was consumer sediment that was driving the market, not fundamentals, and this consumer sediment has all eroded.

 

[Shadow]

Is that you Foundation ?? I'm sure it is.

It's been a long time....how the hell are ya ??

Do you still want that job as my property research guy ??

Yes, Max is Foundation. He is now posting on <the other forum that cannot be mentioned> as 'Scary'.

Apparently 'Foundation' lost his password or something...

 

[seank]

Is that you Foundation ?? I'm sure it is.

It's been a long time....how the hell are ya ??

Do you still want that job as my property research guy ??

foundation is sustainability also?

 

[GreatPig]

so property is growing at "only" 1% above inflation each. what is that compounding over 350 years?

About 32.5 times the price.

However, if nominal value is increasing by 4% pa, then over 350 years prices would have gone up by 915,522 times. So a house that costs $300K today would have cost 33 cents 350 years ago (say three shillings and threepence).

Now, according to this article, the plot of land discussed there was bought for the equivalent of 2100 Euros (A$3,990) in 1617. That was 391 years ago. At 4% pa growth rate, it should today be worth about $18,239,316,582 (the article indicates it would be worth several million Euros, but that's a far cry from $18 billion dollars).

If you work back the other way, and generously say it's worth A$10m today, then that's a nominal increase of a bit over 2% pa. If average inflation is 3% pa (your figure - I don't know what the average would be over such a long period), then in real terms the growth rate would be negative.

GP

 

[Sheryn]

Robert Schiller, author of "Traders, Guns and Money" has undertaken research on property dating back to 1629 and asserts that real house price growth is less than 1% at best.

The following article has information on this:

http://economistsview.typepad.com/economistsview/2006/03/shiller_longter.html

Tim

I heard a 'talkback session' on the radio which said house prices are going up on average 1% per month in good suburbs with buyer demand.


IMHO (not based on fact) houses in good areas go up 1% per month. Houses in less desirable areas may stagnate for years (eg. my home town) but then may boom / jump 30 - 100% over a short period.

There are only 2 units under 200K in my home town - a smart investor would go and buy both tomorrow @ 185K & 195K or less if the seller & REA hasn't read the paper.


Cheers
Sheryn

 

[Ausprop]

So Shadow, as house prices increase faster that wages, the cost of housing (mortgages or rent) take a bigger slice of the household budget. Rates may be going down, but debt is so much now your mortgage repayments are more than they were in the '80's when rates hit 17-18%.

Based on your predictions, at some stage in the future the average mortgage payment will consume 100% of your household budget (unfortunately for some people it's almost here).

Will the government then give everyone food stamps, cloths stamps and transport stamps? so they can survive on no disposable income? It all just went into housing costs.

Maybe we will become a generation of renters? That's o.k, but by that time rental yields will be close to 0%, if rents have not gone up. If rents go up faster than inflation/wage growth, you have the same scenario than above. Eventually rent will become 100% of the household budget.

The way this plays out, is that at one stage 1 person will own all the houses as no one else will be able to afford them. (and the country will be stuffed, very much like it is now, because so much money is channeled into Housing, there is no money to spend in the economy to keep us all in jobs)

I'm just interested in how your scenario plays out in the end, Shadow?

interesting. The argument ignores the constant change in the definition of a median house. If I were to go back 100 years, a median hosue in Perth would now be typically a 1000sqm block in an area such as Dalkeith, this would currently be valued now at $2m if in its original state. should I care if I earn $1000 a week and can't afford to rent it? no - because I just rent a modern day median home.... a 4x2 in the burbs for $295pw. And this is why this 350 year study is completely irrelevant and a load of rubbish. If I lived in Amsterdam it may hold something of interest but then I know nothing of the place other than the sex and drugs flow night and day, nor do I know the nuances the market holds or its history so thus is of no interest at all

 

[lizzie]

If average inflation is 3% pa (your figure - I don't know what the average would be over such a long period), then in real terms the growth rate would be negative.

i have no idea what the average inflation over 400 years is either. it may well have been no inflation for 100 years, then 1% for another hundred, then negative growth for 20 years, and then whatever ...

i am sure someone has a stat for average inflation over the last 100 years in australia - then we can dig up some inner city properties for the same period - and work out whether property performs above or below inflation.

 

[Max Carnage]

IMHO (not based on fact) houses in good areas go up 1% per month.

So a $2,000,000 house today in Sydney would have been worth less than the median Sydney house price 20 years ago?

The argument ignores the constant change in the definition of a median house. If I were to go back 100 years, a median hosue in Perth would now be typically a 1000sqm block in an area such as Dalkeith, this would currently be valued now at $2m if in its original state. should I care if I earn $1000 a week and can't afford to rent it? no - because I just rent a modern day median home.... a 4x2 in the burbs for $295pw.

That seems to be confusing the issue. If the change in median dwelling explains away any problems with price changes for individual properties, why has the price of the median risen so much faster than inflation (especially over the last decade)?

 

[ffc1883_1996]

... The problem with the doom & gloomers, is they think the crash is always just about to happen.

... On the other hand, I recognise that a crash is certainly possible sometime in the future, but I can also see that the current environment is not conducive to a crash in Australia, and that the current powers-that-be will do everything in their power to delay it for as long as possible. They will succeed for a lot longer than you think they can!

Perhaps, if there is to be a crash, it could occur when houses are in oversupply. That’s some way into the future I think (unless Australia’s population takes a dramatic nose dive).

 

[keithj]

For the last 40 of those 350yrs, houses have been a discretionary expense. Before that the population was still progressing up it's hierarchy of needs (food, any shelter, health etc). People have only recently (40 yrs) had sufficient discretionary $$$ to spend on a more expensive house than the Jones.

It's in humans genes to be strive to be better than their neighbors.... and as long as peoples discretionary spending continues to grow, a large proportion will continue to spend it on housing. Discretionary spending has risen faster than wages growth (CPI @ 3%, wage growth @ 4%) for the last 20+ yrs.... roughly correlates to rising house prices too .

 

[lizzie]

also - if you read up on your history - 130 years ago the majority of people did "not" own their house. property was owned by the wealthy landlords and the majority rented.

but delving even deeper into the history of 130yrs ago - in a capital city such as london - most of the inner suburbs were slum tenaments with 2-3 families occupying a single room - no plumbing, not cooking facilities etc. sometimes the workers just rented a bed rather than a room - which they would share with someone who was working an opposite shift (no linen change).

or those with money who did own a home often had a contingent of servants who share the home with them, but the servants were only supplied with a room the size of a modern broom closet.

personally i think living conditions and expectations have changed dramatically in that period of time - and even more so in 350yrs

 

[Ausprop]

So a $2,000,000 house today in Sydney would have been worth less than the median Sydney house price 20 years ago? :confused

not sure about 20 years, certainly 50 years. and not less than, just equal to. I cite the suburb of Dalkeith in Perth because it is interesting to note that the original land release was at similar prices to the much lesser suburb of Lathlain.... demonstrating the change in perceived value of the land thru time.

That seems to be confusing the issue. If the change in median dwelling explains away any problems with price changes for individual properties, why has the price of the median risen so much faster than inflation (especially over the last decade)?

the change in a median dwelling must be a seriously contributing factor - how can you deny that?? my point is it isn't apples for apples.

and I thought the theory put forward was that there was no house growth? getting confused....

 

[Dazz]

I cite the suburb of Dalkeith in Perth because it is interesting to note that the original land release was at similar prices to the much lesser suburb of Lathlain.... demonstrating the change in perceived value of the land thru time.

Ausprop,


Just to add some data to your comments.


Dalkeith (6km from the Perth CBD) was developed in 1914. The blocks, mostly quarter acre - some bigger, sold on the following terms ;


Riverfront and bigger blocks.....36 pounds 2 pounds deposit, remainder interest free loan
All other blocks......................28 pounds 1 pound deposit, remainder interest free loan


To build a house cost about 450 pounds I'm told, the equivalent of 16 blocks.


Riverfront blocks now sell for ± 4.4M. All other blocks sell for about 2.7M. People won't pay you 10c for the houses, they just smash 'em down and build again.


So, over the past 94 years, we have the following appreciation rates ;


Riverfront blocks of land have gone from $72 up to 4.4M, or 12.44% p.a.
All other blocks of land have gone from $56 up to 2.7M, or 12.15% p.a.


Quite reasonable really, and something you would expect. I'm sure there would be many similar examples in Sydney, Melbourne and Brisbane of other such like inner city property histories.


Finally - what of the appreciation of the houses.....well, lets just say the chap who bought sixteen blocks instead of building a house....and decided to live in a tent for a while is slightly better off today.

 

[myla]

hello,

should get Shiller down to Perth with $72 and see how he goes hey Dazz?

although i dont think he would leave when he hits paradise, dont need to pack heat in Perth like Everywhere in the US
thanks
myla

 

[Peter Parker]

Leveraged property investing does not require appreciating house prices to succeed.

Even if it's just passive borrow, buy & hold.

Provided there is inflation the real value of money owing will fall, putting you in front even if the property's value remains static.

Assuming inflation also applies to rents, properties will still go from negatively geared to neutral to positive, thus pushing up yields.

The only case where leveraged property investing doesn't work is when there's sustained deflation.

And every single treasurer and banker is so scared of that that they'll do all in their power to stop it happening.

Peter

 

[HiEquity]

Ausprop,
Dalkeith (6km from the Perth CBD) was developed in 1914. The blocks, mostly quarter acre - some bigger, sold on the following terms ;

Ha! Older relatives of the in laws sold their riverfront Dalkeith block between the wars because of the mosquitoes and because they wanted to trade up to Coolbinia / Mount Lawley, which was the place to be at the time.

That decision had a small impact on their children's inheritance. Who would have thunk it?

 

[Sunfish]

Lizzie, there is nothing in your post I find compelling logic but this bit stands out as being faulty:

okay - so property is growing at "only" 1% above inflation each. what is that compounding over 350 years?

The rule of 72 says that prices will have doubled 5 times ie the median property is now 32 times the price it was 350 years ago in constant dollars. Over that period the owner would have knocked down and rebuilt at least 5 times (plus war devistation ) so holding costs clearly have not been zero.

Put that way, I'd decline the offer to invest.

 

[yieldmatters]

Leveraged property investing does not require appreciating house prices to succeed.

Even if it's just passive borrow, buy & hold.

Provided there is inflation the real value of money owing will fall, putting you in front even if the property's value remains static.

This is one of those myths that just won't die. I've tried to kill it so many times.

You pay INTEREST which compensates the lender for the real value of the principle dropping. Yes, your property value is static and the real value of the money owing is falling but you have a constant cash outflow (interest) to PAY for it. There is absolutely no free lunch from inflation if you are on a variable interest rate and your real interest rate remains constant.

 

[Sunfish]

Hey, moving my prime investing focus from cash to property in 1998, from property to shares and metals in 2003/2004, then from shares to cash in December 2006 worked out pretty well for me so far. If this is what if feels like to be a "poor professor", I kinda like it!

So why are you here and not the Bahamas?

 

[Sunfish]

This is one of those myths that just won't die. I've tried to kill it so many times.

I've tried too. It is just soooooo illogical.