The soft depression that we had to have

[stingray]

Boomtown
Steve Keen didnt say that a 40% drop is a worst case scenario. He said he expected 40% and that was 'being generous'. I have done plenty of research on this and on average, median house prices need to go down by about 50% to get down to historical multiples. And yes, that would mean that rental yields would be an absolute minimum 6%, but in most cases 7-10%. This is what rental yields have generally been historically, amd that is what they were before we began the biggest housing boom in Australia's history. For many years people have belived that housing was 'risk free', that's what people think when you get into a bubble. People become blinded. Try telling that to people in Perth or Brisbane right now, try telling people who invested in holiday homes over the past few years. Most holiday homes in Australia are in danger of losing 60%-80% of there peak values. Go and do a search right now for property at your favourite holiday town and see how much stock is on the market. The stock on the market has gone through the roof and there are hardly any buyers. For the sellers, it looks like its too late already in these holiday towns.
Traditionally, rents were always more than loan servicing costs as there was a risk that properties could keep going down in value. Renters would pay a premium to rent, as they did not have all the extra bills of landlords and they were freeto move whenever and wherever they wanted.

 

[Ausprop]

Traditionally, rents were always more than loan servicing costs as there was a risk that properties could keep going down in value. Renters would pay a premium to rent, as they did not have all the extra bills of landlords and they were freeto move whenever and wherever they wanted.

when was that? it certainly wasn't post 1990.

 

[Francesco]

Stingray

I wonder whether you have read the many past threads on SS discussing the SK theories, the 40% RE drop, IMF to-ing and fro-ing, Demographia data, debt ratio, etc. You have only 6 posts and either you have not seen the other threads and may be rehashing some of the arguements, which many forumites have patiently responded, or have you a personal agenda (akin to cphg)?

The RE market at the moment is suffering from a lack of confidence where rationale may not necessary apply, psychology and rumours apply. I see price drops in RE with non significant statistical data (vendors withhold as there are few buyers). At the moment, many in SS discuss and make educated guesses, however when we repeatedly go over old grounds (as the saying goes: even a lie repeatedly often enough...) we risk a self-fulfillment scenario. For example, if we keep on saying it is going to be bad and everyone starts tightening their budget regardless of its business case, we will damage the retail sectors and others.

I think we all need to exercise some civic responsibility. When we start something bad, no matter unintentional, it may hurt others and may rebound on the author.

 

[373au]

Boomtown
Steve Keen didnt say that a 40% drop is a worst case scenario. He said he expected 40% and that was 'being generous'. I have done plenty of research on this and on average, median house prices need to go down by about 50% to get down to historical multiples.

What are you comparing the house price to? If it is a single average income this is not realistic as you will get a completely different figure if you use household income. Houshold income is a more realistic comparison as it then compares the house price the the available income of a the very common dual income family.

Spud

 

[BayView]

FEAR .... emotions, non rational thought. It seems like most people have trouble making a decission to purchase an investment property when things are going well and the media is telling us to buy property.

With all the doom and gloom around I think it would be very difficult for most people to even contemplate purchasing an investment property. Very similar to the sentiment in the early 90's. Property was very much on the outer.

Regards
Graeme

Don't you love it?

More for us.

 

[boomtown]

Oh well if the drop bears are telling me I'm going to get 10 percent yields everywhere that really would be incredible.

Me and my family should be able to pick up 10 to 20 positively geared resi properties which should set us up nicely. I might even get my girlfriend's family in on the action - they have owned IPs in the past.

Looking forward to it.

 

[Bill.L]

Hi all,

Stingray,

Traditionally, rents were always more than loan servicing costs as there was a risk that properties could keep going down in value.

Wrong again.

In the '80's rents may have been 7-8%, but interest rates were 12-15% before the late '80's boom. We have had 2 booms in prices in the last 20-30 years with property yielding less than prevailing interest rates.(unless you are referring to the lower class cashflow positive properties of Steve McKnight, Brenda Irwin etc).

There is a very good reason for this as well. Namely changes in lending practices to include wifes income for serviceability and dual income families.

As society has changed, you need to include the effect of those changes on what statistics tell you.

bye

 

[Rockstar]

Stingray
You have only 6 posts and either you have not seen the other threads and may be rehashing some of the arguements, which many forumites have patiently responded, or have you a personal agenda (akin to cphg)?

or you have been debating in the other threads and have merely changed your name - yet again? Where has Max Carnage gone?

 

[lizzie]

this is a very poignent point! so many of the stats bandied around compared housing prices to the average income instead of the average "household" income.

the colation of figures behind the stats needs to be changed to reflect the times.

sure at $60,000 a $400,000 average house is 8 times the income ... but ... if the other partner is earning $30,000 by working part time then the average house is only 4.4 times the average household income - and therefore in the affordability range.

and that doesn't include any of the numerous government handouts like family benefit, fhog, $1,000/child stimulus packages etc which could easily put another $10,000 (tax free) onto the income.

 

[stingray]

Spud,
You raise a good point about single income vs household income. I have all the stats from average wages and cpi going back many years, yet the household income figures I have only go back 12 years or so. Surprisingly, the household income figures are only slightly higher than median income figures over the past 12 years.

Bill,
I am talking about prior to the the high inflation era which began in 1974. Rents were generally more than servicing costs for many, many, many decades. In the USA, Canada, Japan, Switzerland, Austria and many more countries the loan servicing costs are generally less than or equal to rental costs.

REIV figures for September Qtr are out today and it looks like Melbourne was already in a bit of trouble prior to October ! I would imagine Melbourne is in a lot of trouble now, like most of Australia. It looks like the 'crash' has well and truly started accross Australia. I would be really interested to know if someone can tell us us a subrub, region, suburb or town that is holding up well at the moment ?

 

[sash]

There are always suburbs in the broader market that will peform, try:

1. Western suburbs of Melbourne - ie. Wyndham and Melton shires

2. Campsie, Auburn, and Merrylands in Sydney - low end units are moving well

REIV figures for September Qtr are out today and it looks like Melbourne was already in a bit of trouble prior to October ! I would imagine Melbourne is in a lot of trouble now, like most of Australia. It looks like the 'crash' has well and truly started accross Australia. I would be really interested to know if someone can tell us us a subrub, region, suburb or town that is holding up well at the moment ?

 

[WinstonWolfe]

the colation of figures behind the stats needs to be changed to reflect the times.

Lizzie, I think the average wage to median price ratio is a more useful stat. WHy?

- both partners don't necessarily work consistently, whether part or full time.
- having kids disrupts household income
- people are staying single longer
- divorce or separation rate is higher
- job stability is lower...as in people change jobs more frequently and less people are employed permanently

When you take all this into consideration, the median wage is a more stable measure of house price affordability than household income.

And obviously, using household income masks a decreased std of living as house prices go up relative to median income....by requiring more combined manhours at work.

Those who think more hours at work per household doesn't represent a decreased quality of life often quote how women have been liberated from the tyranny and boredom of being housewives. THere's some truth in that, but trade it off against the additional stress that leads to higher breakdown between couples, an obesity epidemic positively correlated with dual income families, and associated decreased health and life expectancy.

 

[evand]

Not sure what you mean by 'moving well' but i have seen no price rises in low end units in western suburbs of Sydney of late.

There are always suburbs in the broader market that will peform, try:


2. Campsie, Auburn, and Merrylands in Sydney - low end units are moving well

 

[keithj]

Lizzie, I think the average wage to median price ratio is a more useful stat. WHy?

- both partners don't necessarily work consistently, whether part or full time.
- having kids disrupts household income
- people are staying single longer
- divorce or separation rate is higher
- job stability is lower...as in people change jobs more frequently and less people are employed permanently

When you take all this into consideration, the median wage is a more stable measure of house price affordability than household income.

It may take 2 incomes to buy a first home, but it doesn't take 2 incomes to service the loan after say 5 years.

• The home has increased in value (by CPI or more), so they have a much more expensive home than they could have afforded 5 yrs earlier.
• 5 yrs of wage inflation has made the monthly P&I bill (which remains fixed for the full 25 yrs) a significantly smaller proportion of wages.
• CPI rising at less than wages growth increases disposable wages exponentially.
• 5 yrs of paying P&I has reduced the P part - it's easy to go to just paying Interest Only for a yr or two to spit out a couple of sprogs before returning to work.

The first year is the hardest - it gets exponentially easier after that. So both partners working consistently isn't necessary for the duration of the loan. Do yourself a spreadsheet with P&I fixed, with CPI increasing slower than wages and see what happens to house affordability as well as loan affordability in the real world.

And thats why the RBA doesn't care about median incomes & median house prices and their ratio as a guide to affordability.

 

[urchin]

[*]The home has increased in value (by CPI or more), so they have a much more expensive home than they could have afforded 5 yrs earlier.

But... if we use this logic, why in the world would anyone want to buy now as we have the exact opposite situation you describe above. We have rising inflation and falling home prices. Even if we predict a modest 2-4% drop in home prices and no increase in the current rate of inflation (around 4-5% i think), the benefits of waiting are huge.

Let's say I'm looking at a 400k house. the combined effect of price drops and inflation results in a drop of somewhere between 24,000 and 36,000 over the course of a year. That's equivalent to my rent and then some. Furthermore i get to keep the interest i am earning off my deposit AND i get to continue adding to that deposit reducing my eventual mortgage amount and the interest repayments that would go with it. Assuming that every dollar borrowed is $2.5 repaid, if i manage to add another 10k to my initial deposit that's 25k saved (over a long period of time, i admit).

given the fact that i stand to gain roughly 40 grand--or a full 10% of the house i am looking at--under this scenario why in the world would i choose to buy now?

of course it is not inconceivable that house prices might go up and inflation might fall. but in this economic environment, with a recession looming large in the rear view mirror and the global economy going into anaphylactic shock, i think that my scenario has a much better chance of panning out than yours.

Since the first year, or first five years, are the hardest--would it not make sense to do everything one can to minimize the difficulties of those first few years? Especially in an environment where job security has become a real concern?

 

[lizzie]

I think the average wage to median price ratio is a more useful stat. WHy?

because if you're going to compare standard apples of the past with standard apples of today then the stats need to reflect the standard of that snapshot time.

30 years ago a one income family was standard. now the standard is more like 1.5-2 income family.

which is why they need to compare medium household income:medium house price.

if the stats are going to compare the past with the present then the changes in the standard social norm need to be included in their calculations - to provide nothing more than a snapshot of the situation at that precise moment - and taking average household income would capture the singles, stay at home adult children et al.

 

[keithj]

But... if we use this logic, why in the world would anyone want to buy now as we have the exact opposite situation you describe above. We have rising inflation and falling home prices. Even if we predict a modest 2-4% drop in home prices and no increase in the current rate of inflation (around 4-5% i think), the benefits of waiting are huge.

Since the first year, or first five years, are the hardest--would it not make sense to do everything one can to minimize the difficulties of those first few years? Especially in an environment where job security has become a real concern?

You've just demonstrated that you understand cycles and that you're a market timer -there are lots of SSers that understand them too. With your mindset you shouldn't buy now - there are lots of posters who aren't buying now (& who haven't bought for 5 yrs). You're telling us nothing new.... just remember what happens to bottom pickers.

Many here have a different mindset - they think now is a great time to buy (c/f +ve, rising rents, falling IRs) - a long term, set & forget low, risk investment.

And lots don't have as short a timeframe as you (you'll note that I mentioned a 5 yr timeframe in my post above) - they have a 40 yr timeframe. Ya reckon house prices will be higher or lower in 40 yrs ? Will rents be higher or lower ? Will cash be inflated away to be almost worthless ?

Imagine if EVERYONE thought like you - no-one would ever buy because they know it will be cheaper tomorrow. Value investors wouldn't exist. And FHB tend to be value investors - they buy houses because they can afford them and not because they are smart enough to buy at the exact bottom of the market (which is what you appear to be advocating).

So you stick to your market timing investment strategies, and many here will continue to ignore you and stick to their strategies.

 

[quoll]

Let's say I'm looking at a 400k house. the combined effect of price drops and inflation results in a drop of somewhere between 24,000 and 36,000 over the course of a year. That's equivalent to my rent and then some. Furthermore i get to keep the interest i am earning off my deposit AND i get to continue adding to that deposit reducing my eventual mortgage amount and the interest repayments that would go with it. Assuming that every dollar borrowed is $2.5 repaid, if i manage to add another 10k to my initial deposit that's 25k saved (over a long period of time, i admit).

given the fact that i stand to gain roughly 40 grand--or a full 10% of the house i am looking at--under this scenario why in the world would i choose to buy now?

Nicely put Urchin, one of the better arguments for waiting and not buying now.

If people understand the issues and the RISKS, if they are willing to bet on your scenario. Waiting is the better option.

As always we won't know until after the fact.

But anyway, I like your argument.

Cheers
Graeme

 

[Bill.L]

Hi all,

urchin,

Let's say I'm looking at a 400k house.

Then you are probably not a first home buyer on an average (single) income.

When we bought our first home in 1981, it was at the peak of the boom at the time. It would have been much cheaper to keep renting at $70pw rather than paying off the loan at 13.5% (we then quickly fixed at 14.5%). On the loan size of $30,000 (house was $44,000) interest payments were $78 pw plus then there was the principal as well.

There was inflation, and many people thought it the wrong time to buy as housing was overpriced. In fact many people thought that prices would fall over the short to medium term, after all interest rates were at record highs.

We paid that loan off over the next 6 years with both of us working fulltime. As Keith has already stated, the rising wages but fixed cost of the loan really made the compulsory loan repayments insignificant after a couple of years.

Nobody knows the future, all we can do is make guesses and not just on the macro position. A young couple today, who can afford, and are ready to buy now, may very well be much better off buying now than even if they believed houses could be 10% cheaper next year.
Their own situation may change, banks may look for different criteria next year. They could spend the money for the deposit on some do-dad because it is so tempting sitting there, plus if houses went up 1-2% instead of going down, they may feel they have another year or two to rebuild the deposit.

Pretty soon a few years have gone by waiting, waiting, waiting for the bell to ring for the bottom of the property market.

bye

 

[evand]

I'd say most of the many posters on here of late doing it tough financially have resulted from buying at the wrong time of the property/economic cycle.

No one said you have to be a bottom picker, you just have to buy at the correct time or thereabouts. Property is such a slow moving target, its not difficult to time it pretty ideally. Anyone who says you cant either isn't trying or doesn't have a clue.

There is no other way to invest in property imo than timing your purchases. Not all times are ok to buy investment property. Now being one.

So you stick to your market timing investment strategies, and many here will continue to ignore you and stick to their strategies.