Realistic growth expectations

[Aaron Sice]

20 years is not a timeframe i personally would invest in anything for blindly, without at least 5 yearly reviews for the interim.

one can only hope that in 20 years an asset will be worth more. You could find in that period we have the mother of all booms and father of all busts.

said it before, say it again - hope is not an investment strategy.

 

[tom32]

I'm no expert, but have friends working in finance/managerial roles for big miners.

Apparently the projections prepared by these companies are up to 50 years forward and are generally bullish. The belief is there that the growth will continue and these companies are investing heavily as a result of such projections.

I don't want to sound too academic about it but industry cycles are a very well understood phenomenon and have been witnessed time and time again. i.e. it is conventional economic wisdom and we have no evidence to suggest this time is different?

The upshot is for the period that prices exceed costs capacity builds. In commodities it takes around 5 years for a mine to go from planning to production.

At the same time as Australia and our various mining companies are investing billions into capacity building so to are the rest of the commodities producing countries and their mining companies.

At some point while prices remain well above costs capacity will meet demand and prices will fall.

This particular cycle has been called a "super cycle" as it is associated with the development of the most populous country on the planet. I must admit 50 years though is what I would be telling my financial backers if I was a miner but I sure don't believe that.

An industrial cycle lasts approximately twice as long as the length of time it takes to bring new capacity on line in that product. This is not a solid exact rule by any stretch but I do not expect it to take 50 years for capacity to catch up. Probably given where we are in the investment phase of this current cycle we probably have about 2 to 3 years to go as I say above. This is for iron ore at least.

 

[Graemsay]

Graemsay, what would be the approx yield on these properties 10yrs from now if the prices will be 80-90% of todays value? What makes you think investors won't jump in before and push prices higher?

Assuming that rents track wages, over a decade they'd increase by around 50%. So the increase in yield would be:

1.5 / 0.8 = 1.875 ~ 85% to 90%

I'd expect things to shift from something like 4% rental yield / 7% capital gains to 7% yield / 4% gains.

If there is a bit slump in prices then the economy is likely to be screwed up, people will be out of work, and the banks won't be lending. And investors with a heavily negative geared portfolio probably won't be able to borrow to take advantage of this so easily.

However I suspect that there will be people who do very, very well out of it.

That said, it depends on how the market plays out. My calculations are based on a consistent, steady growth rate.

Following the 1989 peak in the UK, prices dropped for seven years, with the nadir being in 1996. They picked up during the late nineties, went ballistic around 2000, before peaking again in autumn 2007. This trend is a U shape.

If the Australian market follows that trajectory, then the bottom of the market would be somewhere around 2017 or 2018, prices could still be 30% or more lower by 2020, and possibly more that double what they are now in 2030. Though the whole cycle could be longer.

Secondly, what would be the average wage and approx. disposable income available to service debt? If you think disposable income to service debt will be higher in 10yrs time what makes you think ppl will not spend that extra money to buy a bigger better location house thus by pushing house prices higher?

If prices in Sydney halved then buying a median house would still put a family on a median income into mortgage stress. I don't know about other markets, but I suspect that Melbourne is similar.

Buyers are going to need a growth in income to be able to afford current levels, and I can't see prices rising ahead of earnings over the next 10 to 20 years as other posters.

 

[BV]

If prices in Sydney halved then buying a median house would still put a family on a median income into mortgage stress.

Graeme

Cities and suburbs within the same city are not all the same. People who live in a particular suburb can afford to live there or they would have moved.

For example, to own a 1 Mill $ house in Newtown (Sydney) you'll need a family income of lets say $200K and a significant size deposit. Those who don't meet those requirements can buy an apartment for $500K or they can move 30 minutes out and buy a house for $500K.

I actually met someone in Newtown the other day.
He was from the UK and paid $1.8Mill for a house he was going to renovate to live in. So the point is, some people have money or they earn a lot and can afford to borrow a bigger amount. Therefore, the affordability surveys you see published now and then give you an idea of where the median price is compared to average Australian wages but in reality they are meaningless.

The comparison should be done at suburb level and comparing to the averages wages in that particular suburb.

 

[willair]

Buyers are going to need a growth in income to be able to afford current levels, and I can't see prices rising ahead of earnings over the next 10 to 20 years as other posters.

It's only numbers,and as the authorities desire to encourage home ownership presumably on the basic of median area prices,i still think in Queensland prices will flatline for several years some properties in Brisbane RiverFront high end Areas after the recent floods and non insured damage will take years to come back too their prior 2011 Jan value,it's happened before and it's happening right now,and you will never hear that from fast bucks soap box speakers or real estate side show paper handelers ..

 

[investor2009]

End of the day time will tell, but I voted 7%p/a
Talk is cheap, although it's fun to discuss.

 

[Propertunity]

Assuming that rents track wages, over a decade they'd increase by around 50%.

Rents don't track wages, they track house prices. They hover around 5% (in most Aust. capitals) then fall back when house prices increase, which can happen suddenly, (since rents are often locked in on 6 - 12 month leases and therefor lag), then they overshoot when house prices flatten / fall.....and so the cycle goes.

Over a decade (typical full RE cycle) they would typically increase around 100%, like house prices, unless it is "all going to be different this time".

 

[Graemsay]

A Maths Lesson

I don't want to be inflammatory here, but most posters don't grasp compounding in a geometric series.

To put it simply, there is no way that house prices can rise faster than incomes over the medium to long term.

Using the figures from my Demographia post: Gross median household income in Sydney was $82,000 in 2010, the median house price in Sydney was $640,000, and assuming wages (and household income) grow by 4% per annum.

If house price inflation is between 7% and 10% then the median multiple will hit:

• 10 times between 2015 and 2025.
• 20 times between 2027 and 2049.
• 30 times between 2035 and 2063.
• 40 times between 2040 and 2073.
• 50 times between 2044 and 2081.
• 60 times between 2047 and 2088.
• 70 times between 2050 and 2093.
• 80 times between 2052 and 2098.
• 90 times between 2054 and 2102.
• 100 times between 2056 and 2106.
• 1,000 times between 2097 and 2186.
• 10,000 times between 2138 and 2267.
• 100,000 times between 2179 and 2348.
• 1,000,000 times between 2220 and 2429.

At some point you're going to hit an affordability limit where people simply cannot afford to pay any more.

Equity in a house would become irrelevant because house prices represent a transfer of money from younger to older individuals, and first home buyers don't have any. Sure there might be an inheritance, but I'd expect that would arrive in someone's 60s or 70s. That might benefit your children more than it would benefit you.

 

[Corey Batt]

Annnnnnd the penny drops.

 

[Wunderbar]

Ah I do love the mathcraft here. Simply put, you can't compare house prices over time esp in Melbourne because each house is different. Back 20 years ago the less desirable areas then are now today's middle-class suburbia. It's all due to development of areas that were previously farmland/commercial sites.

These new estates will remain less pricey than established suburbs, so the 'average' guy will always be able to afford a house, just not in the best places (which is what this current generation wants right here, right now). The more desirable places are bought by people who are way above average income and who have massive amounts of assets/equity. How can you compare that to the guy who works in a factory in Dandenong?

 

[Corey Batt]

Oh I get it, so you're saying that they can always move to the new and or slummy areas to find affordability. Meanwhile all the blue chip suburbs will be filled with individuals who can afford property on 100 multipliers by 2050's.

So which is it? Is there going to be a massive expansion of the super rich to afford all the current suburbs turning into blue chip suburbs at 100 times prices, or is there going to be a price correction?

 

[Aaron Sice]

So which is it? Is there going to be a massive expansion of the super rich to afford all the current suburbs turning into blue chip suburbs at 100 times prices, or is there going to be a price correction?

column a and column b - if capitalism's past is anything to go by.

 

[Wunderbar]

Yes, that's right. I give you an example: The most prestigious place you can live in Hong Kong is on Victoria Peak - it's where the British colonists used to reside. Someone bought a house there for ~A$140m...yet the average Hong Kong wage is more like A$30k. Does the multiple matter? Does the rich guy care what the 'average' guy can buy? Of course not.

Even closer to home - Point Piper houses go for $30m yet the average Sydney wage is probably only ~70k.....again, who cares what the average joe/jane does?

 

[Graingrower]

If inflation averages 3-4% then the cost to build the same spec house should rise at 3-4%/year. If property rises at 7% on average, then it must be the land that is increasing in value, not the buildings. That makes sense because ther is a finite amount of land, but we can always build new houses. If it is the cost of building it could be:
1) houses are getting bigger
2) houses are getting more luxurious
3) compliance is getting more difficult, eg 5 star energy ratings.

The logical solution to lack of land is more high rise appartments near the CBDs of our major cities.

 

[Corey Batt]

Yes there are always going to be super expensive houses Wunderbar.

But for there to be continual averaged 7%+ increases leading to multipliers of 100 times average wage, all of the current houses in Australia (8+ million houses) would be those super rich houses.

Either suddenly everyone is going to become super rich to afford this (aint going to happen), or there is a correction through short term or long term trends(or both!).

Common sense buddy.

 

[alexlee]

But for there to be continual averaged 7%+ increases leading to multipliers of 100 times average wage, all of the current houses in Australia (8+ million houses) would be those super rich houses.

Either suddenly everyone is going to become super rich to afford this (aint going to happen), or there is a correction through short term or long term trends(or both!).

Common sense buddy.

Common sense tells me that 50 years ago, there weren't 8 million houses in Australia. Say there were 4 million, based on a population of 10m (I'm plucking numbers out of thin air here). Have all of those properties that existed 50 years ago become way more expensive than what average wage earners can afford? I would say yes, which is what you are saying cannot happen, because everyone would have to be super rich to afford them.

Yet, currently there are places that the average wage earner can afford. How can this be?

The answer is that the number of properties increases as the population increases. The 4 million houses of 50 years ago are now 4 out of 8 million houses. By definition, then, they are all above the median, and I agree that median properties are not affordable for average wage earners without a significant deposit (from selling an existing property, say).

The current body of houses CAN keep going up, IF new, cheaper properties are built (new outer areas, units from existing houses, etc). I'm not saying they WILL, but they can without violating common sense. The current 8+ million houses can all become too expensive for average wage earners IF, for example, it's the most expensive 8m out of the 20 million houses we have in 50 years time.

 

[tom32]

Common sense tells me that 50 years ago, there weren't 8 million houses in Australia. Say there were 4 million, based on a population of 10m (I'm plucking numbers out of thin air here). Have all of those properties that existed 50 years ago become way more expensive than what average wage earners can afford? I would say yes, which is what you are saying cannot happen, because everyone would have to be super rich to afford them.

Yet, currently there are places that the average wage earner can afford. How can this be?

The answer is that the number of properties increases as the population increases. The 4 million houses of 50 years ago are now 4 out of 8 million houses. By definition, then, they are all above the median, and I agree that median properties are not affordable for average wage earners without a significant deposit (from selling an existing property, say).

The current body of houses CAN keep going up, IF new, cheaper properties are built (new outer areas, units from existing houses, etc). I'm not saying they WILL, but they can without violating common sense. The current 8+ million houses can all become too expensive for average wage earners IF, for example, it's the most expensive 8m out of the 20 million houses we have in 50 years time.

Agree but the fringe house while land still exists on the fringe should track inflation. i.e. because of production costs tracking inflation.

the fringe block has not because the government has changed the way it looks at development from being pro-development in the 50s to being beholden to the NIMBY's.

On top of this because credit has made much more expensive homes more affordable it has also enabled the governmetn to milk new development to the point where it is only just viable to develop at all. This is evidenced by the lack of development in our most populous city; Sydney while prices are so far above raw costs excluding government taxes.

 

[recruit2]

After a short term fall.

Would rather high growth mining stocks in a mining boom than high hold cost high growth property.

Invest in the highest returns, anything else is just silly.

Yeah good call. For me, its the perfect time to be building a business and not to be overly obsessed with property. The gains of the past that I did very well from just aren't around in the current environment. I think I can do much better by building up my other investment class (a profitable business) and then come back and take a fresh look at property again a little further down the next cycle..

If I had the cashflow right now, I would purchase an IP in Western Sydney just for the hell of it, but its looking a little tight right now with all hands on deck and every dollar being poured into the business. I can't be greedy and take on too much at once otherwise the business will fail as well. And build a successful business and you can have 5 houses later.

 

[alexlee]

Agree but the fringe house while land still exists on the fringe should track inflation. i.e. because of production costs tracking inflation.

the fringe block has not because the government has changed the way it looks at development from being pro-development in the 50s to being beholden to the NIMBY's.

To me, over time the fringe is no longer the fringe. I have a map from just 20 years ago. Whole suburbs simply didn't exist then. Though yes, changes in how infrastructure is paid for, for example, would have an impact.

On top of this because credit has made much more expensive homes more affordable it has also enabled the governmetn to milk new development to the point where it is only just viable to develop at all. This is evidenced by the lack of development in our most populous city; Sydney while prices are so far above raw costs excluding government taxes.

True, financial deregulation has made credit more available. If there was a permanent pullback, the ability to pay more drops as well.

I don't see lack of supply as an impediment to price increases, though.

But I'm not going to argue every detail. I'm not saying property will definitely keep increasing. I'm saying, under certain circumstances, a GIVEN property (not some price representing the whole market) CAN keep going up. You can argue the circumstances and the probabilities until the cows come home. The only point I'm trying to make is that it's possible.

 

[tom32]

I don't see lack of supply as an impediment to price increases, though.

I think exactly as you do. A lack in supply puts upward pressure on prices.

Not worried here about volumes being built worried about what each new home / block costs to produce.

The more expensive land becomes on the fringe or the more expensive it becomes to develop it the more upward pressure is put on prices.

Also on what you say about fringe land yes it will not be fringe in the future and so it will be worth more than teh block on the fringe. However it is fringe blocks which one could expect would track inflation. i.e. a block in Baulkham Hills in 1980 would be similar inflation adjusted to one in Rouse Hill in the late 90s.

they are not but this is because of the increase government componeent in these fringe block between the 80s and then 90s plus the urban consolidation policies limiting the number of blocks available for urban development.

it is these policies I would be looking to for direction of house prices. The Liberal state government in WA said 12 months ago they would be releasing more land and freeing up land supply and sure enough house prices are struggling.