no argument from me there.
The bulls could be right, but i always like a 'margin of safety' to act as insurance.
We will defy history if the bubble doesn't burst
- Thread starter Property Meister
- Start date
no argument from me there.
The bulls could be right, but i always like a 'margin of safety' to act as insurance.
a margin of safety is good - anyone spouting otherwise is a very obvious permabull (not that there's anything wrong with that...
)double checking your DD is what it's all about. is your investing plan sustainable? are you buying a peak or a trough? will it matter either way?
just go in with your eyes open and use your head, not your "gut feel".
DUAL incomes
In 1989 we bought first home. Lender said , without any hint of political correctness of today, "of course we cannot count your wifes income, you are about to get married and clearly will be having children a year of two" - we were 22.
She was right! except it was 17 years later.
Now banks take everything into consideration. That why prices doubled over 1990's. Is that going to change?
DINK look it up.
Peter 14.7
In 1989 we bought first home. Lender said , without any hint of political correctness of today, "of course we cannot count your wifes income, you are about to get married and clearly will be having children a year of two" - we were 22.
She was right! except it was 17 years later.
Now banks take everything into consideration. That why prices doubled over 1990's. Is that going to change?
DINK
look it up.Peter 14.7
In 1989 we bought first home. Lender said , without any hint of political correctness of today, "of course we cannot count your wifes income, you are about to get married and clearly will be having children a year of two" - we were 22.
She was right! except it was 17 years later.
Now banks take everything into consideration. That why prices doubled over 1990's. Is that going to change?
DINK
Peter 14.7
Your logic is correct, so is the logic about current scarcity of supply relative to growing demand, so is the logic about the long term decline in interest rates from the 1980's to now (with the short exception period in the early 1990's) supporting a sustainable borrowing amount.
These are all factors that support the market.
But to what extent is the market already PRICING in these support figures? This is a key question in my opinion when looking at FUTURE growth rates.
With the exception of cash flow positive property, most residential investment property is bought upon not just the expectation but also the reliance of good future price appreciation.
Will this good future price appreciation occur? well thats what all the debate is about. Dont look at me i dont have the answer, but neither do i have the insurance to cover myself if they dont.
I had insurance when i bought in 2007, but not now at these higher levels.
Now i hear some people saying but property doubles every 10 years. And this axiom could well continue, my 'gut' feeling is that if it worked consistently in the past it will probably (but not certainly) work into the future. But it doesnt mean a consistent increase every year by 7%.
Who knows we could have another year of say 10% growth followed by 9 years of positive/negative fluctuations totalling zero growth for 9 years, followed by a whopper of a growth year in year 11.
In such a case the axiom would still hold, but i just wonder as to the popularity durability of residential investment property under such circumstances.
Why is the popularity important?
because if an asset is priced on popularity it will be priced closer to perfection, ie with less 'risk' priced into the asset.
If the popularity decreases, then the 'risk' factor demanded will increase, which puts upwards pressure on returns (ie greater return demanded).
We have already seen this effect on the share market.
The 'popularity' effect can be seen through the change in market supported PE ratios.
Pre GFC PE ratio's where sustainable on a higher basis. Why because shares where popular, people where happy to buy on a lower 'risk factor'. The market had a lower pricing of risk.
Now consider the same market post GFC.
Shares are less popular, those participants still in the market want a higher 'risk factor', hence a lower PE.
This factor is apart from the factor that discounts slower growth in post GFC world and can be seen in the PE ratio's of those companies that are still maintaining their pre GFC growth rates (and expect to maintain those growth rates into the future), but now trade on a lower PE.
No it's not going to change, but that "shift" has already occurred. It has pushed the price, once.
To maintain the "momentum" of price appreciation you need to find "new" free money in the punters' pockets. I don't see it.
I agree but one factor that has occurred is the cost of most manufactured items than housing, energy and food has gone down over the last 20 years.
Cars, Whitegoods, Appliances, etc...That have moved money from these items to housing.
In fact, it is because Housing construction in Australia is significantly bespoke, that is one off, that it costs have not dropped. Combined with the lack and demise of trades, per M2 rates only rise. Throw in Green requirements and Council and State Gov charges and you have the perfect storm for increased prices regardless of affordability.
Obviously prices must stop somewhere but until we have coordination and rationalization of Government in Australia I don t see it. Sydney’s median is $600k and growing.
Peter 14.7
Very deep and meaningful question here! Well put.
I can only apply my “bush” economics and say:
- Residential property price is all about supply and demand
- As people have to live somewhere
- And assuming supply remains as is
- You ask “Will demand drop as income drops”
Also if the economy drops, housing starts drop as developers stop investing and banks stop lending to projects - so supply drops, more floor to market as rents rise.
Again, unless there is fundamental change in the way housing is delivered in our Country and really MASSIVE like investment in very fast trains to regional Aus, creating jobs in regional cities, removal of Government layers, and an acceptance by the average Aussie their new first home is not a house but a unit – I don’t see any reason for massive drops in prices. Assuming we are OK economically, even 10% unemplyment that IMO there is no reason for prices not to rise in the RIGHT areas.
Peter 14.7
I shoudl also put HOusing IMO is long term investment.
I have IP I bought in a low rent suburb for $112k all up, in 1999. It now rents for $300 a week. Very little maintenace over that period and my rates are 6.5% ish.
It is postive geared. It will only go up in rent and value. I dont want to sell, It is all good.
Peter
I have IP I bought in a low rent suburb for $112k all up, in 1999. It now rents for $300 a week. Very little maintenace over that period and my rates are 6.5% ish.
It is postive geared. It will only go up in rent and value. I dont want to sell, It is all good.
Peter
A point I have often made myself. Add to that the "equal wage" legislation which gave women more money, the "anti-discrimination act" which allowed them to keep their job after marriage (it wasn't always so), the subsequent rapidly rising number of double income housholds and the "middle class welfare" which allowed these same families access to gov. funding of child care etc and you have the fuel which fed the bonfire.
I still don't see where the free cash flow will come from to stoke the fires further, especially with our tax and spend governments (both parties).
At this point I can only say that they can't spend money they don't have. There is a lot of fat in the system with everyone having their hand in the pocket of homebuilders. If times get tight and they were all forced to sharpen their collective pencils, new (smaller) houses could be put on the market much cheaper than now.
All very good points people and I am listening...
I too wonder about what the next leg up will be and what will drive the increased affordability. Will it be a sustainably lower level of mortgage interest rates? This is possible given our very high interest rate setting but is unlikely with the RBA leaning against a potential bubble and inflation driven by our export economy. Peter talks about more disposable income due to the lower cost of everything else which is also a good point but I take Ausprop's points on board too about Chinese currency inflation.
I reckon medicine and health in general is set to get sharply cheaper in the western world as the way we manage illness transforms completely with new technologies currently underway. Health is a huge drain on personal and public coffers and reducing the cost here would create a lot more disposable income.
I also think transport and energy are set to get a lot cheaper in the medium future with renewable energies which might be another catalyst.
Of course, then there's also the weight of money argument. As we bring more capital into Australia in the hands or the earning capacity of our immigrants we bring more money to bear on the current property market. Absent a commensurate growth in supply, then obviously more money chasing less assets equals price appreciation. The marginal buyer will be forced further out. With a greater pool of income earners there will be more at every level of the income spectrum to ensure price appreciation across the board if supply remains limited.
I don't think price increases will necessarily be as radical as the shift to dual income households but there is still scope for increased affordability levels. However, as posted previously property seems to increase at the same rate as real increases in earnings. We continue to earn more per individual in real terms and this flows directly through to our major capital purchases on property. They're the ultimate accessory.
I don't think we need another big change to the paradigm to continue to see property outpeform headline inflation. And with inflation running at 3-4% pa its not too much to expect property to track at a 7-8% level so long as wages and inflation continue to perform as they have done historically relative each other.
FWIW, Ross Gittins posted today of the Greek and Europe jitters that his position is that this too shall pass...
Stay calm, this too shall pass
Cheers,
Michael
I too wonder about what the next leg up will be and what will drive the increased affordability. Will it be a sustainably lower level of mortgage interest rates? This is possible given our very high interest rate setting but is unlikely with the RBA leaning against a potential bubble and inflation driven by our export economy. Peter talks about more disposable income due to the lower cost of everything else which is also a good point but I take Ausprop's points on board too about Chinese currency inflation.
I reckon medicine and health in general is set to get sharply cheaper in the western world as the way we manage illness transforms completely with new technologies currently underway. Health is a huge drain on personal and public coffers and reducing the cost here would create a lot more disposable income.
I also think transport and energy are set to get a lot cheaper in the medium future with renewable energies which might be another catalyst.
Of course, then there's also the weight of money argument. As we bring more capital into Australia in the hands or the earning capacity of our immigrants we bring more money to bear on the current property market. Absent a commensurate growth in supply, then obviously more money chasing less assets equals price appreciation. The marginal buyer will be forced further out. With a greater pool of income earners there will be more at every level of the income spectrum to ensure price appreciation across the board if supply remains limited.
I don't think price increases will necessarily be as radical as the shift to dual income households but there is still scope for increased affordability levels. However, as posted previously property seems to increase at the same rate as real increases in earnings. We continue to earn more per individual in real terms and this flows directly through to our major capital purchases on property. They're the ultimate accessory.
I don't think we need another big change to the paradigm to continue to see property outpeform headline inflation. And with inflation running at 3-4% pa its not too much to expect property to track at a 7-8% level so long as wages and inflation continue to perform as they have done historically relative each other.
FWIW, Ross Gittins posted today of the Greek and Europe jitters that his position is that this too shall pass...
Stay calm, this too shall pass
Ross Gittins said:
Cheers,
Michael
The point of how much fcf we have left to service debt is something I have tried to clarify for some time.
I explored household saving ratio as a proxy for it.
In the last 15 years, it has a rough negative correlation with property growth.
However, it is a rough relationship indeed, and leads me to suspect credit supply and lender risk appetite are the primary driving factors of property growth, not household debt serviceability. I am sure the govt and banks would have us believe it is the other way around though.
Hi all,
Michael,
I'm afraid I cannot agree with this. I think we are on the cusp of peak oil and the consequences are going to be massive. Even the US military are saying the world will be short by ~10 million bbl/d by 2015. Being inelastic the demand will send the price skyrocketing until economies slowdown enough to curb demand. In the mean time the renewables will get more expensive as there is just not enough to cover the shortfall created by peak oil.
The next few years do indeed look to be turbulent times.
bye
Michael,
I'm afraid I cannot agree with this. I think we are on the cusp of peak oil and the consequences are going to be massive. Even the US military are saying the world will be short by ~10 million bbl/d by 2015. Being inelastic the demand will send the price skyrocketing until economies slowdown enough to curb demand. In the mean time the renewables will get more expensive as there is just not enough to cover the shortfall created by peak oil.
The next few years do indeed look to be turbulent times.
bye
Hi Bill
I wouldn't go that far. IMO demand is more elastic than most think - perhaps not so much for us but certainly in the developing world. Quite apart from that there is a veritable flood of renewables waiting in the wings for energy costs to rise before they come into the money. In terms of transport fuels, this may bring along the electrification that has been promised for so long.
Electric cars, renewables and other technologies of the future are certainly more expensive than the fossil mainstream today. To predict that renewables will ever bring down the cost of energy from their current lows is certainly extremely optimistic. However, if the price of oil, gas and coal doubled tomorrow and stayed that way long term, it would bring out an awful lot of new technologies currently waiting in the wings. There is a ceiling to energy cost increases introduced by these technologies, combined with the increased energy efficiencies that would result. I can't see a long term runaway situation developing in the absence of abrupt supply disruptions (which are still quite possible of course).
We have to remember that today energy (and water) is just insanely cheap, which is why we waste so much of it...
As for health care, technology improvements in the health sector have typically been associated with burgeoning health care costs rather than the other way around. Of course health outcomes have also followed a similar trajectory of improvement so it's certainly not necessarily a bad thing - just that everyone wants the latest and greatest treatment, no matter the cost...
Sadly I think all indicators point to it going the opposite way - the new technologies you speak of cost a fortune and in Australia's case the aging population places a burden on the health system that is massive and increasing.
Hi HiEquity,
I didn't doubt this, but recently I am becoming more aware of the timing plus the simple fact that many of the materials needed to make the modern lithium/whatever batteries have limited supply.
On the timing, we will not need extra power stations, whatever type for the first few hundred thousand electric cars (using spare off-peak capacity), however after that there will be a need for extra generation that is just not planned yet, let alone built. This being on top of the extra generation that is needed just for population growth, without consideration for the older power stations that need replacing.
The timing being the near future where the troubles are, not the distant future when the renewables become commonly available.
I think only a doubling would be nice, yet that will not curb use much. When the real shortages start, I'm thinking price rises by a factor of 5 or 10 could happen, even if for only a short period.
bye
I didn't doubt this, but recently I am becoming more aware of the timing plus the simple fact that many of the materials needed to make the modern lithium/whatever batteries have limited supply.
On the timing, we will not need extra power stations, whatever type for the first few hundred thousand electric cars (using spare off-peak capacity), however after that there will be a need for extra generation that is just not planned yet, let alone built. This being on top of the extra generation that is needed just for population growth, without consideration for the older power stations that need replacing.
The timing being the near future where the troubles are, not the distant future when the renewables become commonly available.
I think only a doubling would be nice, yet that will not curb use much. When the real shortages start, I'm thinking price rises by a factor of 5 or 10 could happen, even if for only a short period.
bye
I do agree with experienced posters here stating that they are only buying in specific areas and are very wary of the lack of yield and value in cities and also certain reginal townships. I have almost 60 properties over the last 10 years of accumulation and personally thought the bubble in capital cities (me, Melbourne) have developed since 2005-2007. I haven't bought anything even in Melb or its fringes in 4 years as i thought the bubble would burst in 2007-2008. Then came the GFC and the US housing market; where i went yep here it is. Then boom, its gone spastic again. The houses in my area were yielding 6-6.5% when i bought them and now they are 2-2.5%. REAs are still telling me they are going up and the demand is still there.
How long can this go one for? Why are people finding value in assets that are only yielding a gross rent of 2-2.5%? Do they think they can sell it later to another idiot for 1-1.5% yield? Perhaps. Well they would have to just to break even!!
Did anyone see the Herald Sun "History of a home, sale prices" one weekend for a house in airport west, 3-bedder on a standard land block that kept losing money for the owners from 1980 to 2000 where it was sold for $105,000 in 2001 but in 2010 it was sold for $815,000. Truly insane!
Anyway enough of ranting. This market would have to cool by 30-40% before i start looking at the capital cities. If it never happens in my lifetime, i am unconcerned.
Thoughts??
How long can this go one for? Why are people finding value in assets that are only yielding a gross rent of 2-2.5%? Do they think they can sell it later to another idiot for 1-1.5% yield? Perhaps. Well they would have to just to break even!!
Did anyone see the Herald Sun "History of a home, sale prices" one weekend for a house in airport west, 3-bedder on a standard land block that kept losing money for the owners from 1980 to 2000 where it was sold for $105,000 in 2001 but in 2010 it was sold for $815,000. Truly insane!
Anyway enough of ranting. This market would have to cool by 30-40% before i start looking at the capital cities. If it never happens in my lifetime, i am unconcerned.
Thoughts??
Holy smokes!
I'm with Top Gear in thinking the hydrogen powered electric car is the future.....
My view on health care is that outcomes haven't improved with technology.
The overwhelming majority of health issues are lifestyle related, and our lifestyles have taken a definitive turn for the worse in the last 30 years. For instance, the cost of obesity and diabetes far outweighs that of improvements due to technological advances.
Health care cost blow outs are most related to increased diagnostics and the schedule of pharmaceutical benefits, and an aging population. Hospital beds, operating theatres, and GP supply are restricted.
As consumers gain access to more information, they are demanding more tests. And GPs, path and radiology labs aren't inclined to knock back what puts more money in their pockets...
The most cost effective health care is upstream preventative measures, but the govt is too ignorant and influenced by vested interest to make any significant impact any time soon. So count on health care blowing out possibly to 20%+ of GDP.
My view on health care is that outcomes haven't improved with technology.
The overwhelming majority of health issues are lifestyle related, and our lifestyles have taken a definitive turn for the worse in the last 30 years. For instance, the cost of obesity and diabetes far outweighs that of improvements due to technological advances.
Health care cost blow outs are most related to increased diagnostics and the schedule of pharmaceutical benefits, and an aging population. Hospital beds, operating theatres, and GP supply are restricted.
As consumers gain access to more information, they are demanding more tests. And GPs, path and radiology labs aren't inclined to knock back what puts more money in their pockets...
The most cost effective health care is upstream preventative measures, but the govt is too ignorant and influenced by vested interest to make any significant impact any time soon. So count on health care blowing out possibly to 20%+ of GDP.
Good points WW - I guess I was thinking of outcomes associated with each technology rather than overall population health.
As to hydrogen it is merely an energy storage technology and a relatively poor one at that, although some of the newer associated hydrate technologies may have promise.
