The 3 decade success story - Housing

keithj, your whole "compositional change" red herring falls apart if you were to simply look at an area that's seen little change over the last 15-20 years and compare price to income ratios (local income to local prices) over time in that specific locale.

But there will always be anomalies. Peoples wages also rise differently. Nurses, teachers can best hope to get pay rises in line with inflation.

Some college drop out decides to write some code and build Facebook/Microsoft has his income rise exponentially. There are so many examples of where people increase their incomes way over inflation. As the economy and population grows you keep adding more and more such high net worth people into the society (look at no. of millionaires now compared to 10-20 years ago).

And it is these people due to their keeping up with the Jones mentality will use their above average disposable incomes towards bidding higher and higher for limited supply of land in established more desirable locations.

To give you an example of popular suburb of Toorak in Melbourne. Imagine there are 1000 houses in Toorak. You cannot sub divide and there is no more land available. Melbourne has 1000 millionaires. They push the average price of Toorak property to $1 million. 10 years later due to economic growth and above average salary rises of certain portion of the population you now have 2000 millionaires. Now there is still only 1000 houses available in Toorak.

The new 1000 millionaires also desire to live in the popular suburb to maintain their status in the community. What gives? Its usually the price. And unfortunately it rises above your average wage rise.

This is the reality whether we like it or not. This is the fairest way we have come up with to make a scare resource available where there is more demand than supply. Economists and FHB don't like and accept this reality.

(PS: Also totally agree with Keith's post about composition being important factor in individual property price rises).

Cheers,
Oracle.
 
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Hobo-jo, interested in your thoughts on why this has happened (similar to the drivers i mentioned in OP or different?) and whether it's nearing/reached an upper bound?
I think you've framed it well.

Enablers - Lower interest rates, decreased regulation (easier credit)
Drivers - Tax advantages (Neg Gearing, 50% CGT disc), government grants, restrictive UGBs & land banking, low levels of construction, increase in dual income households and more recently foreign buyers in some markets.

I don't think the next 30 years will replicate the last 30. I think charting price to incomes over the last 10 years shows we've probably hit peak or close to a peak level achievable (at least without further significant structural changes that I've not foreseen). Private debt to GDP shows a similar peak around 10 years ago that we're now passing, but don't think it will go much further.

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But I think guessing about the next 30 years is rather pointless, the next 5-10 years are much more important as it more closely represents a timeframe that an investor might hold an asset such as a property.

Recent measurement of Sydney's price growth from the 2003 peak to current prices shows a price increase of around inflation, it may go a little higher this time with different drivers, but I soon it expect it to hit a wall and we'll then see another 5-6 years of low/no growth (best case). I don't think prices can continue rising at rates above inflation & wages ad infinitum even with compositional change. We may be able to continue cycling in this upper band of price to income levels, maybe even edge a little higher if interest rates were to fall without any other significant changes, but I think the price risk is to the downside on this measurement (vs incomes).

Some drivers have the potential to reverse and pressure prices negatively... we could see a change to foreign owner laws, change to negative gearing (I think we'll see is restricted to new builds within 12-18 months), macroprudential tools used (RBA has suggested we may see something targeting investors) and higher interest rates (eventually, I suspect they may go lower first). And although I was wrong on the timing of a recession I still think the end of the mining investment boom has the potential to negatively impact our economy over the next few years.
 
Time will tell...see you in 10 years if you're still around and we can discover who's the one eating humble pie.
mmm humble pie, delicious.

Actually I might eat that pie early. I read your post in tandem with that from The Fence and assumed you'd implied a doubling of house prices in 10 years as he did, but you haven't. So my apologies :)

It depends on what was measured in Melbourne, but if you are talking about house prices (circa $650k at present) then a rise to $1m in 10 years would take 4.5%pa compounded growth. That is doable (but I think still a touch on the high side).
 
Hobo-jo, interested in your thoughts on why this has happened (similar to the drivers i mentioned in OP or different?) and whether it's nearing/reached an upper bound?
My view is that Australia is different from many other countries - we have a few concentrations of highly sought after assets. They are highly prized because of their proximity to infrastructure (jobs, entertainment, etc), and consequently they demand a price premium. This has happened for various reasons over the last few decades (centralisation of jobs & entertainment, movement to a service economy rather than agricultural, urban renewal).

Consequently, prices began to appreciate a little. As owners of PPORs pay down their mortgage, they pay proportionally less of their disposable income for the roof over their head (unlike renters) as the years go by.... and then after 10 yrs they have a lightbulb moment... they can actually afford to live in a better suburb than the Jones, and as a bonus their friendly local REA tells them their own PPOR has increased in value.... so instead of scrimping for yrs to afford a 20% deposit, they can actually put down a 50% deposit on a house worth double their current PPOR. No way can FHBs or renters compete with that.

And after 2-3 cycles they easily can upgrade to a house that is well over 10x their wage. For this reason price/income ratios are really not especially relevant to anyone but FHBs who have a piddly 20% deposit. IIRC the RBA occasionally publishes a 30th percentile house price to 30yo average wages ratio showing it has remained within reasonable bounds.

So there are 3 reasons that enable them to afford it - wages growth above their constant P&I repayments (both natural and from promotions), highly leveraged investment gains (PPOR), paying down principle (or enforced saving).

And a couple of reasons why a prestige house remains desirable - population growth (larger pool of people looking for desirable residence) and a smaller supply of presitige PPORs (due to compositional change - thanks to HarryT),

The biggie is that now that prices are on a 7% average annual increase, it will be difficult to stop the ball rolling. Any FHB who bought a $300K house 10 yrs ago already has at least a $300K deposit for their next one today, and far better servicability than they had back then.

While many other countries have a similar factors, their critical missing factors are lack of scarcity of prestige land, and the consistent average investment growth at well above inflation.

Will it continue ?
Wages look like they won't be increasing significantly faster than inflation for a few years (as they have for the last decade)
Popln growth seems to be a bit slower than the last decade
Otherwise the other factors remain the same.

IMO, negative gearing, SMSFs, FHOG, foreign buyers, investors, interest rates are a relatively small piece of this bigger picture, but they do of course help to keep the ball rolling.
 
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The biggie is that now that prices are on a 7% average annual increase, it will be difficult to stop the ball rolling. Any FHB who bought a $300K house 10 yrs ago already has at least a $300K deposit for their next one today, and far better servicability than they had back then.
So basically your position is that prices are not relevant, rather the equity that has built over the boom is more so. Add in a few cheap comments about how 'It's different here' (highlighting environmental factors which were mostly the same in any previous overpriced/bubble western housing market) and that's your argument in a nutshell.

That aside, there still has to be a saturation point, so if it's not price to income, then how about mortgage debt to income (as a % of GDP or disposable income), what level can you see that rising to before it tops out keithj? Or is that also unlimited due to factors I haven't considered?

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Thanks hobo-jo, keith.

I do agree that Australia has 'natural' endowments that make housing very attractive (one of the best countries in the world to live in). This will maintain demand over the long run.

But its only half the story.

I'm not so sure on the supply side - right now, in the middle of a 'construction boom' - it seems like previous barriers withholding supply are slowly being wittled away and it may be able to cope with demand levels into the future (you've mentioned compositional changes).

Also agree there is a saturation point when we're talking about credit - there's been 'structural' shifts in our ability to borrow since the 80s/90s that have pumped up our income/debt ratios. I think we've been at a new equilibrium now, so price growth will trend closer with income into the future, rather than having some ridiculous multiple in the future (great excel sheet showing that hobo-jo).

Cheers,
Redom
 
So basically your position is that prices are not relevant, rather the equity that has built over the boom is more so.
What is relevant is ability to afford desirable assets. Based on the factors above, upgraders have that ability. That's how it has worked in reality for decades. Do you think that a population with the desire and also the ability to pay won't move prices up the curve when there is limited supply.
Add in a few cheap comments about how 'It's different here' (highlighting environmental factors which were mostly the same in any previous overpriced/bubble western housing market) and that's your argument in a nutshell.
I highlighted the critical factors that I consider different. If they crashed & we didn't then I'd consider it different here ?

That aside, there still has to be a saturation point, so if it's not price to income, then how about mortgage debt to income (as a % of GDP or disposable income), what level can you see that rising to before it tops out keithj? Or is that also unlimited due to factors I haven't considered?

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As I've mentioned previously the level of debt isn't particularly relevant - it's the ability to service the debt that IS relevant. I've posted this chart of repayments as a %age of disposable income from the RBA & CBA which is IMO a better metric.
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So saturation point will come when either the desire or ability to service the loan fails to meet the supply. IRs may rise to far, wages may fall in real terms, unemployment rises, inner cities/beachfront becomes less desirable, technology changes making workplaces more distributed, the property bears may sway public opinion - lots of things might happen. But for the next decade I see more upside than downside & have invested accordingly.
 
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I'm not so sure on the supply side - right now, in the middle of a 'construction boom' - it seems like previous barriers withholding supply are slowly being wittled away and it may be able to cope with demand levels into the future (you've mentioned compositional changes).
Sure, the supply of McMansions & apartments will increase, however the supply of desirable land won't be increasing any time soon.
 
Sure, the supply of McMansions & apartments will increase, however the supply of desirable land won't be increasing any time soon.

In terms of the price effect, isnt it more about the number of people that the supply can accomodate? So the desireable land that once housed 1 family, now houses 50 families (the compositional change you mentioned earlier).

From memory Australia has one of the least dense dwelling structures in the world (great Australian dream) - i imagine that to shift closer to worldwide norms over time.
 
In terms of the price effect, isnt it more about the number of people that the supply can accomodate? So the desireable land that once housed 1 family, now houses 50 families (the compositional change you mentioned earlier).
I was referring to the Veblen Effect - desirable house/status symbol/expensive house with affluent neighbors. I wouldn't expect the 50 apartments to be especially desirable by most upgraders, however supply of 1/4 acre blocks adjacent would be reduced and consequently they become more desirable.

The new supply will tend to satiate FHBs, so some upgraders won't get the 10 yr doubling, but over the cycle it will average out.

From memory Australia has one of the least dense dwelling structures in the world (great Australian dream) - i imagine that to shift closer to worldwide norms over time.
I'd tend to agree, but hard to predict which way town planners will go. Increased density can only be good for existing owners.
 
Hi, yields in Singapore were between 3-4% but they fluctuate as everywhere else.

Interest rates are really low - had been for decades. I got a loan for 0.8%

I think the standard rate is around 2.5 - 4 %

KY

Kuala Lumpur is worse. Rates are still low but can shoot up to 10% quickly

Had been low since Mahathir fixed the Rgt against the greenback
 
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