Realistic growth expectations

[Intrinsic_Value]

Given that the projected estimate is 10-20 years from now i see no reason why property cant move in a similar trajectory to its long term historical path.
ie around 7% p.a.


Sorry bears but the projected time frame is long enough to 'wash through' any near term over pricing issues.


The bears are also making one critical error, they are assuming that long term wage growth is only 3-4% a year. This assumes a low inflation environment for the next 10-20 years. A big assumption in my opinion, and you know the saying about making too many assumptions, you run the risk of making an a*s*s out of yourself.

 

[alexlee]

The bears are also making one critical error, they are assuming that long term wage growth is only 3-4% a year. This assumes a low inflation environment for the next 10-20 years. A big assumption in my opinion,

IV, but are you saying that property prices can grow by 7% because wages will also grow by 7%? That is, prices will track wage growth?

I think it's possible, and in fact likely, that the price of a given property, one that exists now and you can buy, will go up by more than wage growth.

 

[alexlee]

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.

So the risk is that the government will release so much land that it keeps prices down in the fringes? Possible, and one of the many reasons why I don't invest in the fringes. Obviously the key to prices is supply and demand. There is plenty of potential supply in fringe suburbs. But how much supply is there for blocks with a trainline nearby? That's the stuff I go for. A outer fringe house will be affected by the supply of other outer fringe houses. Even if outer fringe houses stall because the government suddenly releases a lot of land in the fringes, no one can conjure up a railway line.

 

[tom32]

So the risk is that the government will release so much land that it keeps prices down in the fringes? Possible, and one of the many reasons why I don't invest in the fringes. Obviously the key to prices is supply and demand. There is plenty of potential supply in fringe suburbs. But how much supply is there for blocks with a trainline nearby? That's the stuff I go for. A outer fringe house will be affected by the supply of other outer fringe houses. Even if outer fringe houses stall because the government suddenly releases a lot of land in the fringes, no one can conjure up a railway line.

That is certainly safer yes but I do believe there is a connexion between prices on the fringe and those in inner suburbs. Agree also the existing block will move by more than inflation over the long term as it moves from teh fringe to being more saught after.

However if prices on the fringe are made 50% more expensive, i.e. the block with no infrastructure and less utility then the block in say haberfield will also increase by 50%.

It may not be like for like in percentage terms but I suspect in dollar values the growth in the inner suburb spikes more than the fringe and likewise in reverse they will fall more if the unexpected happens and teh gov in NSW suddenly changes its urban consolidation policy in Sydney.

In the last recession (well in theory Sydney had one anyway post GFC) when they halved the stamp duty on new homes only I thought here we go a policy directed at new supply, I thought maybe things would change but alas it was a one off.

 

[alexlee]

It may not be like for like in percentage terms but I suspect in dollar values the growth in the inner suburb spikes more than the fringe and likewise in reverse they will fall more if the unexpected happens and teh gov in NSW suddenly changes its urban consolidation policy in Sydney.

So for example, if NSW suddenly massively loosens subdivision rules, prices will fall? Possibly, but it then becomes a question of probability. They might, or they might not. But I for one don't see the logic of saying 'don't buy because prices will fall because if the government massively changes its development policy'. That's making decisions based on possibility, which to me doesn't make sense. I make decisions based on probability.

In any case, if I go for houses, then even a change in development rules may not be a bad thing. The house picks up more value as a building block.

 

[contrary]

That inelastic supply curve article that Graemsey or whoever posted was the best article I have read for a while.

There are tighter environmental and planning laws in Australia. This means supply of new lots is relatively inelastic. I think they will be releasing roughly the same number whatever demand is (*). This indicates higher potential price increases or declines with fluctuations in demand than in the past ie the supply curve is a bit like oil.

(*) I doubt there will be massive land releases in the future if prices fall. The government would have to build infrastructure and be more competent at that, which it hasn;t been able to do to date. They will still be releasing the same amount though I think and the levies they apply will depend on what maximises income. If existing stock is priced below what they can sell then they will have to reduce levies to move the stock and maximise revenue. Whcih would be the reverse of what has happened in the last 20 years.

 

[tom32]

So for example, if NSW suddenly massively loosens subdivision rules, prices will fall? Possibly, but it then becomes a question of probability. They might, or they might not. But I for one don't see the logic of saying 'don't buy because prices will fall because if the government massively changes its development policy'. That's making decisions based on possibility, which to me doesn't make sense. I make decisions based on probability.

In any case, if I go for houses, then even a change in development rules may not be a bad thing. The house picks up more value as a building block.

I agree it is unlikely in the current environment. It would take unemployment before they would even have to change policies in this area anyway. At present they make a quid out of the policy through taxation and with more release this could spoil the gravy train for teh government.

Certainly my belief is though it is the reason we have had price growth over the last 20 years even after inflation was brought under control in the early 90s. If we had land use policies like those of Texas or Houston we would have had the same kind of market response to higher prices.

I guess if you hold my view the best place to buy is on the fringe where it is currently a no go area for development. Find acreage where there is no hope for development and buy it as a PPOR. This way if the status quo remains you have a nice block for a PPOR and if they do change you hit gold.

the likes of Sackville in Sydney perhaps Kurrajong too?

If land use policies change then these will be worth a lot more than they are now;

http://www.realestate.com.au/property-residential+land-nsw-kurrajong+heights-2827818

Sure appears to be better value than a block in kellyville. That said you would have to commute outside working hours...

 

[contrary]

Hi Tom32, I have a farm in Bringelly, Sydney with that in mind. I was hoping it would get rezoned at some stage but the whole airport thing is in perpetual limbo. It probably will get rezoned sometime in the next 20 years, whatever happens with the property market. The problem is that land tax is a killer and really does accumulate over time. Also the rental yield is very low so you have to have deep pockets to ride out the period.

 

[tom32]

Hi Tom32, I have a farm in Bringelly, Sydney with that in mind. I was hoping it would get rezoned at some stage but the whole airport thing is in perpetual limbo. It probably will get rezoned sometime in the next 20 years, whatever happens with the property market. The problem is that land tax is a killer and really does accumulate over time. Also the rental yield is very low so you have to have deep pockets to ride out the period.

Sounds like a decent enough strategy because even if land use policy does not change you have not payed for it with the expectation that it would be developed. i.e. you are not competing with developers when you bought it. You might be selling it to one in 20 years though.

For me I think you really have to live there and make it your PPOR so you avoid this land tax. The commute would sure get painfull.

I also thought primary production land was exempt from land tax in NSW?

 

[tom32]

This one is a beuty down that way.

http://www.realestate.com.au/property-house-nsw-greendale-107027646

It appears to be closer to Sydney than many residential burbs!

 

[jingo]

In 2021, I reckon that house prices could be between 80% and 90% of today's. That would be -1% to -2% per annum over the decade.

The key words are 'could be'........

They also 'could be' (there are those words again) double what they are now......

 

[contrary]

Sounds like a decent enough strategy because even if land use policy does not change you have not payed for it with the expectation that it would be developed. i.e. you are not competing with developers when you bought it. You might be selling it to one in 20 years though.

For me I think you really have to live there and make it your PPOR so you avoid this land tax. The commute would sure get painfull.

I also thought primary production land was exempt from land tax in NSW?

Actually, I think there are a number of devellopers who have already bought there, they are part of the ineffectual lobbying to date to remove the airport restrictions on development in the area. I think the lobby group even has a name, which I can't remember. If an airport is built there, it would be a bonus. However, that won't happen, but the development freeze in place means that it can't be converted to a commercial precinct.

I didn't buy it as a PPOR as I have no desire to live there. You can use it as a agricultural business and be exempt from land tax but the rental yield for this is ecxceedingly low and I have no desire to farm. The challenge is to find a way to develop it and make it cash flow positive as part of your business or find a tennant. Within the zoning restrictions, some businesses are allowed, which is what I've looked at. Proximity to the main road is important and so is M2/4 access. Which is why I didn't look in Windsor. Too far from cheap labour pool (liverpool) and inefficient road access makes Windsor unattractive for potential future commercial uses if it ever gets rezoned. I think the only time I would look at Windsor would be after they build a motorway there. That would be mainly for residential rezoning which doesn't interest me that much anyway.

The rough numbers:
1M land value
Land Tax: 16k/a
Interest: 50k/a (on 70% LVR)

You need to get 1,400 in rent per week to make it cash flow neutral. Which is a challenge. You might have to spend an additional 400k-1m to develop it to this potential, building a helipad or sawmill or whatever. Having town water, sewrage is important and can cost 20-50k to connect if the property does not already have this.

You probably need a business plan before buying a rezoning job. The last one I had was in Liverpool and it took 12 years to happen. The capital gain was 400%.

I think the main way small players get into it is not for the rezoning potential, which is just a bonus, but because they have a business that can utilise that land with an acceptable return on capital invested. Most people (other than developers) who buy for the rezoning only don't have the patience or cashflow to ride it out. There is inherent uncertaintly in whether something will ever be rezoned and various political issues that cannot be predicted. It's probably easier to buy undervalued commercial real estate than do the above, but I haven't seen any that have interested me since about 2004. But then again I haven't been very active in looking either.

 

[BV]

The key words are 'could be'........
They also 'could be' double what they are now......

Jingo
Good point mate. But IMO in 2011 there is a very good possibility that prices of many properties will be double what they are today.

Prices of most properties will be at least 50% higher.
So a property selling today for $500K will be selling for at least $750K.
This is only a 4% growth and nothing spectacular but it is the minimum growth possible and a higher % is likely.

My calculations assumed standard wage increases of 5% , current lending criteria and no worsening of current loan affordability.

Rents would have increased by approx 70% so a property renting today for $350/w will increase to at least $570/w
Meanwhile the property bears will be waiting for property prices to fall and for the price of bread to also go back to $1/ loaf....... Don't hold your breath guys because it won't happen anytime soon....

 

[Intrinsic_Value]

IV, but are you saying that property prices can grow by 7% because wages will also grow by 7%? That is, prices will track wage growth?

I think it's possible, and in fact likely, that the price of a given property, one that exists now and you can buy, will go up by more than wage growth.

No i am not saying that the single causality factor for property pricing is solely wages.

However i am saying that over the long term 'medium priced' property will correlate with wages. There is a difference here.

Firstly to address your first point, i am saying that over the long run prices should move by around 7% because that is what has happened historically.
Long run statistics are a good indicator of long run future pricing (which is why i have no exposure to resource shares, in the long term commodities are always priced just above marginal cost of production relative to underlying demand requirements).

But this 7% can be created from multiple angles:
(a) inflation
(b) productivity growth
(c)-(y) other factors
(z) reduction over the long term in land size.

Now how will factors (a) to (z) come into play i have no idea. But they have historically, so they should in the future (again emphasis here is on the long term)

Remember we are talking gross figures here (ie not net of inflation).

In regards to your second comment about individual properties. Yes i very much agree but with the proviso that some will outperform, some will underperform.

In the long run i would argue that the properties that will outperform will be dependent on the underlying value & growth rate of the intrinsic value of the land.

The easiest example i could give of potential underperformance, is where a 'lifestyle' apartment is priced significantly above the underlying intrinsic value of the land.

 

[wobbycarly]

*snip*
Meanwhile the property bears will be waiting for property prices to fall and for the price of bread to also go back to $1/ loaf....... Don't hold your breath guys because it won't happen anytime soon....

Sorry, BV!

Bread may be cut to $1 per loaf

 

[BV]

Sorry, BV!

Bread may be cut to $1 per loaf

yeah and it will be made of hay.
I can't wait....

 

[Graemsay]

If I can be a little more bearish, the last decade has been characterised by by low inflation and consistent growth. But a lot of that's been built on the easy availability of cheap credit.

It's looking like the dominant theme of the next decade, outside of Australia at least, is going to be deleveraging. I'd expect economic growth, and wages, to be lower than they have been to date. Mix in the possibility of a recession, as they tend to come around every decade or so, and my prediction of 4% wage growth per annum could be optimistic.

I know, I'm cheerful tonight.

Intrinsic_Value's post also made me think that price rises could be driven by other factors.

The usual relationship is that as people become wealthier they spend money effectively bidding up property, as they divert more income to this. But how much of this is from buying bigger and better houses?

In the UK the most common mid-sized car has been the BMW 3 series for a while. Twenty years ago it would be a Ford. So consumers are aiming for the more prestigious badge.

Could the same be happening in housing? Essentially this would be the antithesis of IV's option z, above. Though I'm not sure that the typical Aussie house's floor area is growing at a couple of percent a year.

 

[BV]

It's looking like the dominant theme of the next decade, outside of Australia at least, is going to be deleveraging. I'd expect economic growth, and wages, to be lower than they have been to date. Mix in the possibility of a recession, as they tend to come around every decade or so, and my prediction of 4% wage growth per annum could be optimistic.

Graeme

Deleveraging in Europe should not surprise you (after all the austerity measures their governments are forced to take). However, this necessarily doesn't mean that property prices will automatically come down, Supply and demand principles apply.

I don't know if you are aware but after the GFC there aren't many property investors out there so property prices are mostly driven by owner occupiers and the demand is fairly steady which means continuous growth at least in line with inflation.

 

[contrary]

Given that the projected estimate is 10-20 years from now i see no reason why property cant move in a similar trajectory to its long term historical path.
ie around 7% p.a.


The bears are also making one critical error, they are assuming that long term wage growth is only 3-4% a year. This assumes a low inflation environment for the next 10-20 years. A big assumption in my opinion, and you know the saying about making too many assumptions, you run the risk of making an a*s*s out of yourself.

Which trend?

If you look at the long term trend, the one pre 1955 has house price growth equal or less than CPI+GDP growth.

http://www.stubbornmule.net/2009/06/property-prices/

The post 1955-current trend is 9% pa nominal. Where does this come from ? What is the limit of this. Continued price growth above income growth implies increasing leverage.

http://www.datadiary.com.au/2010/04/27/how-much-above-trend-are-australian-house-prices/

What really interests me in the CGT effect. The current CGT laws are going to be terrible in a high inflation, low or negative real return environment. You pay 50% of what you did previously on CGT but there is no inflation indexation. So if property appreciates 5% pa, inflation is 5%pa, for 10 years, you make:
a zero real return
nominal 63% return
CGT of and 25% (at 40% MRT)

Your property has not increased in real terms and you pay CGT of 25% if you sell it in 10 years.

The current CGT laws strongly encourage a holding period of exactly 1 year, you pay CGT on only 50% of this and you only pay CGT on inflation of 1 year. This of course favours assets with low transaction costs (ie shares)

Someone correct me if my figures are wrong.

Not factoring in inflation and tax in accounting for nominal returns is an error.

 

[turk]

Which trend?

Someone correct me if my figures are wrong.

Not factoring in inflation and tax in accounting for nominal returns is an error.

Hi Contary

Not many people would pay cash for an investment property.

Not factoring in leverage is a mistake.

Work your figures on a $10,000 deposit on a $100,000 property.

Net return of about $50,300, not to shabby.

You are correct that the property has not increased in real terms
but my assets have and that is the part that interests me.

Cheers

Pete