RBA just put rates up again to 4.25%

[Graemsay]

WinstonWolfe, the small difference between your GNI and property growth figures would lead to housing taking up roughly twice as much of the national income in 2010 as it would in 1980.

The point that I'm trying to make, and I think Intrinsic_Value is too, is that if property prices continue to grow in excess of incomes then you end up with ludicrous outcomes over the very long term. (e.g. Shacks being worth more than the Australian economy, commuting to Melbourne from Broken Hill, etc.)

Going back to KeithJ's and Witzl's arguments, they show that it's possible for someone to climb the property ladder, even when prices are running ahead of incomes.

But looking at it from an inter-generational perspective, someone entering the market in year 25 will only afford (at best) two thirds of what the original purchaser started with. Run the sequence for a bit longer and you end up with FHBs living in shacks or Broken Hill or whatever again.

I think that an interesting question (perhaps for another thread) would be how do peoples' investment strategies stack up if the market grows at a low rate (say 3% per annum)? What if it falls in real terms?

 

[BayView]

There'll be fringe suburbs that are affordable, but they'll be 100kms or whatever further out than the outermost suburbs are now.

This is an interesting term that gets used all the time throughout life - about how far from "the city" everything is, and it's relevence to property prices.

I find it funny that everyone has this big deal about where everything is in relation to the CBD.

To me; the city is irrelevent now. Everything I need to have to live my life is within 20 mins of where I now live - 60km's from the CBD, and the lifestyle is still just as good.

Yes, I still have to go to the city to see the footy, and the odd concert, but that's it. I don't have the traffic lights and congestion, and hordes of humans to p.iss me off, but still have the restaurants and beach.

I think while everyone views the city of the "centre" of our economic activity there will be this concern - especially by the FHB's - that they must live near it, and hence their whinge when they can't afford to buy near it.

But surely this will change? Maybe not.

 

[Amadio]

I find it funny that everyone has this big deal about where everything is in relation to the CBD.

You just said what I was trying to find words to say. Good point.

 

[Spectre]

Came across this late last night, add it in for what its worth (if its worth it)
http://au.biz.yahoo.com/100408/31/2c7t9.html

 

[keithj]

The point that I'm trying to make, and I think Intrinsic_Value is too, is that if property prices continue to grow in excess of incomes then you end up with ludicrous outcomes over the very long term. (e.g. Shacks being worth more than the Australian economy, commuting to Melbourne from Broken Hill, etc.)

What happens in the very long term may be an interesting theoretical debate, but it has zero relevance to my investing strategy.

Obviously the answer is that something must change. Population growth will stop at some point - probably decreed by govt policy. And then house price growth above wages/CPI will stop because there's no extra demand. The end of the century is my forecast for when it will happen (someone bump this thread in 2099), when the ABS has us with 45 million people.

Going back to KeithJ's and Witzl's arguments, they show that it's possible for someone to climb the property ladder, even when prices are running ahead of incomes.

But looking at it from an inter-generational perspective, someone entering the market in year 25 will only afford (at best) two thirds of what the original purchaser started with. Run the sequence for a bit longer and you end up with FHBs living in shacks or Broken Hill or whatever again.

Yes, in the same way that when I was a FHB I couldn't afford to buy where my parents bought. Over the 25 yrs (from birth) while I was saving a deposit, their house (which was on the fringe) got hemmed in by more suburbs, and hence relatively closer to the CBD. OTOH, when I bought, the building itself was twice as good (better heating/cooling, larger, better kitchen, etc) as the one my parents had to put up with, even though the location was inferior.

If we hit peak population in 2100 with 45M people (roughly twice what we have today), then commuting from Broken Hill is unlikely. Extrapolating to the next century is counter productive, since so much will undoubtedly change in the meantime.

I think that an interesting question (perhaps for another thread) would be how do peoples' investment strategies stack up if the market grows at a low rate (say 3% per annum)? What if it falls in real terms?

We did discuss Would you continue to invest in IP if population growth stopped ? which is a v. similar question.

To me; the city is irrelevent now. Everything I need to have to live my life is within 20 mins of where I now live - 60km's from the CBD, and the lifestyle is still just as good.

Hear, hear.

 

[alexlee]

This is an interesting term that gets used all the time throughout life - about how far from "the city" everything is, and it's relevence to property prices.

I find it funny that everyone has this big deal about where everything is in relation to the CBD.

I agree, but for many industries (banking, legal, etc) it's still very CBD centric.

I think while everyone views the city of the "centre" of our economic activity there will be this concern - especially by the FHB's - that they must live near it, and hence their whinge when they can't afford to buy near it.

But surely this will change? Maybe not.

It will change if they start really building business centres in other areas. Some of the new business parks in Sydney is a step in that direction. Norwest, for example, really opens up the areas around there. LA is one example where no one goes downtown and businesses are decentralised. However, neither is inevitable. Manhattan is still the undisputed centre of New York. It can go either way.

 

[Intrinsic_Value]

I think that an interesting question (perhaps for another thread) would be how do peoples' investment strategies stack up if the market grows at a low rate (say 3% per annum)? What if it falls in real terms?

This is one of my primary concerns.

At the end of the day i am a pretty simple investor. I place alot of emphasis on cash flow. By looking at cash flow i can afford to be patient if market prices do not move in my favour.
The net yld on my apartments is moving down below 3.5%. If we get to a normal interest environment, my borrowing cost will be around 7%.
So my properties need to grow by 3.5% just to maintain parity.

The other factor that i take into consideration is liquidity. If property was the stock market, i might be more tempted to stay put and ride the trend, but with a tight view on the exit sign at the first sign of reductions in volumes.
But property is not, its very illiquid. In a soft market its very difficult to offload (especially inner city apartments). Therefore i have to structure my financial affairs with a view on the future. I have to be pro-active.

Alex and Keith have highlighted very well, that so long as we have long term population growth, property WILL go up over the long term.

But as Keith as shown with the Sydney market, the long term can sometimes be long (and remember we havent even had a recession for 16 years odd). Imagine the Sydney market if we did have a recession.

To me the cost is not just the real return, but also the opportunity cost of lost opportunities, because that money is tied up in an illiquid assets.

I was able to take advantage of innercity apartments trading below intrinsic value in 2007 because i was liquid. I was able to take advantage of shares trading below intrinsic value in 2008/09 because i was liquid.

If i get the debt down on my remaining properties, i can still have them revalued to take advantage of any rises in market prices, but also have the effective liquidity that i desire (through untapped equity).

 

[alexlee]

Alex and Keith have highlighted very well, that so long as we have long term population growth, property WILL go up over the long term.

Actually, that's not what I'm saying. I'm saying that as long as we have long term population growth and economic growth , property CAN go up over the long term. But other factors (recession, lack of confidence, etc) can hurt the market. It's more a response to the idea that property has a natural limit. It might do, but Australia isn't anywhere near there yet, if only because we have real-life examples of cities where prices are much higher than ours.

 

[Intrinsic_Value]

.

I find this quite extreme. Sure, zero debt is very safe, but there are strategies that are 'riskier' than zero debt that I would still consider safe. A combination of low-ish LVR, offset balances and high-yield shares, say.

I understand this, and actually i have already done this to a large degree, by tapping my increased equity in property during the GFC to invest in shares. This put me in a fully invested position.

Now i want to build up my buffers again.

 

[alexlee]

I understand this, and actually i have already done this to a large degree, by tapping my increased equity in property during the GFC to invest in shares. This put me in a fully invested position.

Now i want to build up my buffers again.

That, I get. But that's different from saying you want to hold 2 properties debt free?

 

[Intrinsic_Value]

That, I get. But that's different from saying you want to hold 2 properties debt free?

Actually they would be, because:
1) the only way i would get back to a position of 2 properties is if property prices continue their rapid rise over a short period (ie i am staggering my sales prices)
2) the buffer has to come from somewhere, at this stage i am more comfortable with shares than property, so whilst i am reducing LVR against the share portfolio i am still more than 100% long (because of debt).

 

[HandyAndy888]

Detroit's problem wasn't that housing became too expensive. It was because it lost the one industry it built itself around, and the population halved in a generation. What is the point of mentioning Detroit in reference to 2050? Do you think the Australian population will halve after we lose our biggest industry? What is that, anyway?

Manhattan's median is 800k+, and that's for apartments. Is that very expensive? Yes. Is it going to fall to a more 'logical' level? Not necessarily. By 2050, the house that's 300k now will be completely out of reach of the ordinary person. So what? There'll be fringe suburbs that are affordable, but they'll be 100kms or whatever further out than the outermost suburbs are now.

First and foremost, Alexlee, you are assuming regarding the demise of Detroit. It is pertinent here, since Detroit is still a vibrant city, alive and well. The suburbs however, are a different story and if we keep building suburbs after suburbs after suburbs of 2.4million dollar homes, it's all going to crumble very quickly if ANYTHING negative occurs.

 

[WinstonWolfe]

WinstonWolfe, the small difference between your GNI and property growth figures would lead to housing taking up roughly twice as much of the national income in 2010 as it would in 1980.

Not so. Don't forget that the number of homes has increased also and that the %s I mentioned are annual growth rates, which compound the difference over multiple years.

Well, let's do a rough estimate to compare 1980:2008 gni versus housing stock value.

GNI
2008 727 B
1980 132 B
= 5.51x increase.


Australia's Total Housing Stock Value

2008 = 3.6 Trillion

1980 : To estimate total value of housing stock, multiply total dwellings by estimated median price.
total dwellings = 4.1m
Derived 1980 median dwelling price (includes units and regionals) = 30,000

Total Housing Stock Value = 4.1m * 35,000 = 143.5B

Increase in Housing stock Value
= 3600B/ 143.5B = 25x

These figures are very rough and I'll stand corrected if anyone wants to research it more deeply.
But it bears out that Australians are channeling a profoundly higher % of national income into housing today than in 1980.
The opportunity costs are enormous.

 

[WinstonWolfe]

Further, consider the chart below, and ask yourself are the trend lines of both plots sustainable.

 

[Shadow]

Further, consider the chart below, and ask yourself are the trend lines of both plots sustainable.

Average household size has actually started trending back up again recently.

In my opinion this is because we are no longer building enough houses to allow people to continue 'spreading out' at the rate at which they desire.

 

[WinstonWolfe]

Nice charts Shadow. I like the middle one. Where'd you get it?
I made something similar a while back.

And those who think ever higher population will improve our lot should consider the trend in rnndi per capita. Our population growth is a drag on real disposable income growth.

 

[Ausprop]

And those who think ever higher population will improve our lot should consider the trend in rnndi per capita. Our population growth is a drag on real disposable income growth.

wow that was a SLAP! how did you draw that conclusion? could we also plot on that graph the consumption of ice cream in China?

 

[kum yin lau]

Hi, Intrinsic Value, with PPOR, people work differently.

My sister bought an oceanfront property in 03 for 600K. Paid off in 5 yrs.

They also own apt in Melbourne & Sydney.

Probably extreme example. All her friends [turned 60 last year] own PPOR with no mortgage.

Her daughter will have paid off a 500K PPOR but of course they bought 'earlier' in 98.

Maybe I'm in the wrong demographic: I can reel off people I know who don't have PPOR mortgage but can think of few people who do have mortgages. These tend to be under 40.

We have raised this point before. When we look at the stat about total mortgages vs total earnings, is it specifically defined how much of that is PPOR borrowing & how much is investment borrowing?

Is the 90+% LVR as prevalent as we suppose?

KY

 

[WinstonWolfe]

wow that was a SLAP! how did you draw that conclusion? could we also plot on that graph the consumption of ice cream in China?

How about South Korea's GNI vs population growth.

 

[Ausprop]

How about South Korea's GNI vs population growth.

yeh chuck that on as well.

what's the point - are you saying that population growth always lowers living standards? is this proven in the case of say the UK and US and similar countries?

regardless of what the stats there is clearly a case for economies of scale and international influence. The size of the US economyis the only reason it's citizens enjoy (for now) such perversely low interest rates

it's nuts that I can have all my clothes and PS3 games etc freighted from the UK and US far cheaper than what can be bought here. it is a direct lowering of living standard as a result of a small population