Will Australia's next property boom be the greatest boom we've ever seen?

[Angelo]

Interesting to note that during the period when people were paying 19% interest rates that property prices did not fall below previous levels. No fall below previous levels after the boom in 02 / 03 either. If we do go through any economic down turns I know that I would rather have my money tied up in property as opposed to the stock market.

 

[FHB]

Or cash if people are paying 19% to borrow from you.....

 

[myla]

hello,

the continual high cost of building (or replacement cost) will maintain prices,

companies like Boral & CSR that have decreased building sales yet prices are always increasing for plasterboard etc,

even with construction at low levels to what they were, yet it is still very profitable to be working in the building indusrty, cashed up bogans?

thankyou

myla

 

[FHB]

So construction costs will be the basis of the next boom being bigger than the previous one?

 

[myla]

hello,

the continual high cost of building (or replacement cost) will maintain prices,

hello,

will maintain prices, with more than likely steady increases, no boom

i believe the boom occurred as Aus truly became part of the global economy,

but hey, lets see what happens

thankyou

myla

 

[luce.rocks]

Thanks for the link FHB, that's turning out to be quite an entertaining thread .

Bwwaaaahahahaha! What a ripper thread! Makes us Somersoftarians look very civilised. Not that we aren't....

 

[JIT]

Bwwaaaahahahaha! What a ripper thread! Makes us Somersoftarians look very civilised. Not that we aren't....

It's pretty entertaining isn't it - SS is quite boring by comparison!

 

[jingo]

Thanks for the link FHB, that's turning out to be quite an entertaining thread .

Great read JIT. I am still laughing! I think 'F' (Foundation) must have put a curse on our forum. It is very slow tonight. Maybe the internet is going into meltdown while he tries to re-create a trend line from charts and graphs on the movement of house prices around the globe over the past few centuries.

The language used on that forum is disgraceful.

Regards Jason.

 

[yieldmatters]

Financing house price rises

Trend lines are interesting but you need to question the prediction of the trend with a little common sense as well. A rising nominal price needs to be financed with dollars. Wages? Debt? Foreign money? Where will the cash come from?

Just thought I'd repeat myself .....

 

[JIT]

The language used on that forum is disgraceful.

The whole forum is a disgrace.

All my recent posts are now 'disappearing' into the ether!

 

[FHB]

hello,

will maintain prices, with more than likely steady increases, no boom

i believe the boom occurred as Aus truly became part of the global economy,

but hey, lets see what happens

thankyou

myla

I pretty much agree....

 

[keithj]

Irrational Accidental Investors

Where will the cash come from?
....
Just thought I'd repeat myself .....

Remember that OOs (who represent >70% of the market) don't pay rent, instead they pay down their mortgage. So when they upgrade they have a huge deposit (often >50%), so they can afford to buy a more expensive place. Their repayments stay relatively low compared to their salary.

eg
Assume an OO buys PPOR in 1990 for $200K
By 2007 it has increased in value to $500K & they've paid it off in that 17 years.
If they want to upgrade they have a $500K deposit for their next PPOR. Assume their salary has increased only with inflation, so they can afford P&I repayments on slightly more than the original $200K back in 1990... say $250K.
So after only 17 years they can afford a $750K house with no extra financial stress.

These figures are conservative - that 1990 $200K house is probably worth more like $600K, and I'd expect salary to increase at more than inflation and many pay their house off in less than 17 yrs.

So the cash comes from 2 places - the principle they paid down over those 17 years and also the 7.2% annual growth in their PPOR.

The end result is that an OO can afford to buy a house almost 4 times as expensive as 17 yrs ago, even though his salary has less than doubled. OOs don't buy PPORs as an investment, they buy for other irrational reasons - eg keep up with Jones, or because they can. They are accidental investors who probably don't understand what the word yield means and even if they did it certainly wouldn't matter.


Now consider a renter whose salary has also increased with inflation - has he accumulated a deposit simply by having a roof over his head ? how much rent can he afford ? and does yield matter ?


IP investors take advantage of the irrational behaviour of OOs.

 

[FHB]

that 1990 $200K house is probably worth more like $600K

.....

The end result is that an OO can afford to buy a house almost 4 times as expensive as 17 yrs ago, even though his salary has less than doubled.

Only if the seller can convince a buyer to come up with 3 times the amount the house cost in 1990. This may be possible due to lower interest rates, higher employment, etc. as a one off effect.

The real effect may be that entry level houses increase at a slower rate than properties next step up the ladder, because entry level buyers have no equity growth to rely on and they may not be able to pay higher multiples of income than previous buyers. This would have to affect the equity upgraders can rely on for their next step up the ladder. Perhaps they will find other ways to pay higher prices, debt or investments?

 

[lizzie]

Thanks for the link FHB, that's turning out to be quite an entertaining thread .

well - that made the eyeballs pop!

although i was impressed to see fhb's tone was one of reason and sensibility - we must've taught him some manners! good on ya for being a voice of reason amongst the muck, fhb.

although, one can understand why those from that other forum come over here in an agressive mode - it's what they've been taught as acceptable.

anyhow - get back to the topic - mush mush

looking at the charts at ghpc, i find the period since dollar deregulation to be of the most interest ... it was only at that stage that we truly become part of the gobal economy.

 

[alexlee]

Yes, the 'trade up' effect is certainly one driver of property. Obviously most people can't go from nothing and suddenly borrow a mil from the bank. Those who are buying in the more expensive suburbs are most likely selling / refinancing existing property and buy a more expensive house with a big deposit.

However, this depends on the entire market going up. i.e. if your home isn't going up in value, then you can't sell and buy a more expensive home.

The key, then, is the first home buyers and entry level people. That's the market that's hit hard at the moment especially in Sydney. Further interest rate rises will make that worse.
Alex

 

[FHB]

although i was impressed to see fhb's tone was one of reason and sensibility - we must've taught him some manners! good on ya for being a voice of reason amongst the muck, fhb.

Thanks lizzie, actually I learnt how to discuss objectively over at ski.com.au, they can be brutal over there. Once you get baited and throw in an emotive response you have lost the thread, as foundation found out.

The thread did ask an interesting question though, as Shadow has touched on here. Are long term growth trends based solely on passing time, or do we apply inflation? This was the question foundation asked, unfortunately his numbers let him down.

AMP seem to suggest they think inflation is important, perhaps its important because this reflects wage growth. As I said before, I think wage growth is a constraining factor, historically houses always cost 2-3 times income, jumping a bit higher with the trend of dual income households. More recently access to cheaper credit and high employment have resulted in a greater disconnect from this long term measure, it could be sustained, sure, but all these factors are one offs, they can't repeat infinitely.

Thats not to say that other factors can't step in and help prices disconnect further from incomes in the near future and provide another, larger boom. I just can't think of what they are, yet. If they do over a long term, then AMP's graph will be proven wrong.

 

[Shadow]

The real effect may be that entry level houses increase at a slower rate than properties next step up the ladder, because entry level buyers have no equity growth to rely on and they may not be able to pay higher multiples of income than previous buyers. This would have to affect the equity upgraders can rely on for their next step up the ladder. Perhaps they will find other ways to pay higher prices, debt or investments?

Yes, and this is what we are seeing at the moment, with the high-end suburbs surging ahead (which is how the booms usually begin). However, after a few years, this top end growth starts to drag up the lower-end suburbs too... because people go to buy a house in the top-end suburbs, realise the price has moved beyond their reach, and start to look at the middle-end suburbs, which drags up the prices in middle-end suburbs, and so on eventually through to all suburbs, with the bottom-end suburbs moving right at the end of the boom.

 

[Shadow]

Where will the cash come from?

The same place that the cash has always come from... when people want somewhere to live, then they will find the cash somehow...

Look at all the cities in the world where house prices are much much higher than Australia... London, Paris, Rome, New York, Seoul, Tokyo, Hong Kong, Singapore, Dublin, Beijing, Moscow etc.

In these cities, people find a way to buy even though the price per square metre has increased to ridiculous levels. Firstly, the units get smaller and smaller in size, while demanding higher and higher rents (which keeps the investors in the market).

Eventually only the super rich can afford to buy or rent close to the city. As a result, the median prices for these cities keeps getting higher, and 'normal' people are forced to live much further and further out in the suburbs. So price growth in the suburbs may not keep up with the price growth in the cities, but it will still grow, because people need somewhere to live. If they are forced to rent forever because they can't afford to buy then so be it... normal people will rent, the investors (and rich people) will buy, and prices will keep rising.

We end up with a two tier system. This is what is starting to happen now in Australia... our property markets are just catching up with the rest of the world. The trend is irreversible, so long as the population keeps growing. The only thing that can reverse the trend is depopulation, which no government will ever consider.

Cheers,

Shadow.

 

[yieldmatters]

Remember that OOs (who represent >70% of the market) don't pay rent, instead they pay down their mortgage. So when they upgrade they have a huge deposit (often >50%), so they can afford to buy a more expensive place. Their repayments stay relatively low compared to their salary.

eg
Assume an OO buys PPOR in 1990 for $200K
By 2007 it has increased in value to $500K & they've paid it off in that 17 years.
If they want to upgrade they have a $500K deposit for their next PPOR. Assume their salary has increased only with inflation, so they can afford P&I repayments on slightly more than the original $200K back in 1990... say $250K.
So after only 17 years they can afford a $750K house with no extra financial stress.

These figures are conservative - that 1990 $200K house is probably worth more like $600K, and I'd expect salary to increase at more than inflation and many pay their house off in less than 17 yrs.

So the cash comes from 2 places - the principle they paid down over those 17 years and also the 7.2% annual growth in their PPOR.

The end result is that an OO can afford to buy a house almost 4 times as expensive as 17 yrs ago, even though his salary has less than doubled. OOs don't buy PPORs as an investment, they buy for other irrational reasons - eg keep up with Jones, or because they can. They are accidental investors who probably don't understand what the word yield means and even if they did it certainly wouldn't matter.


Now consider a renter whose salary has also increased with inflation - has he accumulated a deposit simply by having a roof over his head ? how much rent can he afford ? and does yield matter ?


IP investors take advantage of the irrational behaviour of OOs.

OK - but the person they sell to for $500K or $600K - where do they get the money?

 

[yieldmatters]

The same place that the cash has always come from... when people want somewhere to live, then they will find the cash somehow...

Look at all the cities in the world where house prices are much much higher than Australia... London, Paris, Rome, New York, Seoul, Tokyo, Hong Kong, Singapore, Dublin, Beijing, Moscow etc.

In these cities, people find a way to buy even though the price per square metre has increased to ridiculous levels. Firstly, the units get smaller and smaller in size, while demanding higher and higher rents (which keeps the investors in the market).

Eventually only the super rich can afford to buy or rent close to the city. As a result, the median prices for these cities keeps getting higher, and 'normal' people are forced to live much further and further out in the suburbs. So price growth in the suburbs may not keep up with the price growth in the cities, but it will still grow, because people need somewhere to live. If they are forced to rent forever because they can't afford to buy then so be it... normal people will rent, the investors (and rich people) will buy, and prices will keep rising.

We end up with a two tier system. This is what is starting to happen now in Australia... our property markets are just catching up with the rest of the world. The trend is irreversible, so long as the population keeps growing. The only thing that can reverse the trend is depopulation, which no government will ever consider.

Cheers,

Shadow.

But your graph was not median price per square metre - it was simply median price based on a "trend". I'm saying your trend is impossible as it can't be financed.

If you mean price per square metre then you are talking about something more logical.