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

[alexlee]

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

It goes down the line. ALL properties get more expensive. That's the ripple effect.

Though long term it can keep rising, it won't be a straight line. Eventually there will be a recession, resulting in job loss and credit tightening. Then the market will stagnate or fall, maybe for years, before resuming it's long term trend.
Alex

 

[Shadow]

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

If the buyer is an Owner Occupier buying 2nd or 3rd property, they get the money from the sale and increased equity in their previous houses.

If the buyer is an Investor, they get the money from the equity in their other IPs, and use rental income and negative gearing to off-set the holding costs.

If the buyer is a First Home Buyer, they don't buy this house. They buy something cheaper even further out. Or they rent it from the investor. Remember that in the 17 years since the first sale, this house is no longer an outer-suburb house. It is not appropriate for a FHB to expect to be able to afford it.

Bottom line ... somebody, somewhere, will have the money.

Cheers,

Shadow.

 

[alexlee]

That would be the long term trend. Short term...... who knows.
Alex

 

[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.

My graph showed the median price for Sydney, Melbourne and Brisbane... our biggest cities. As discussed in previous post (and as per other large world cities, London, Paris, New York etc.) eventually only the investors and super rich can afford to buy in the big cities. This allows city prices to increase exponentially. The ripple-down effect leads to rises in the outer suburbs. People will always find the cash to live somewhere, either by buying or renting. After all, what other option do they have? And where-ever they choose to live, their demand will push up the prices in that area.

No, I don't believe it can increase exponentially forever... but until such times as Australia actively encourages and implements extremely high-density development similar to other large cities, the price trend will increase exponentially. The move towards high-density development will occur, but slowly, because people living in the more affluent areas do not want their suburbs subjected to row upon row of skyscrapers.

Any local government that tries to tell the folks in Sydney's Northern Beaches or Melbourne's Toorak that their nice leafy suburbs will be flattened for high-rise will not be elected for long. So the trend towards higher density is so slow that eventually only the investors and the rich can afford to buy in the city. Everyone else rents, or moves further out.

It can also be argued that there is a hard limit on how far high density can go. What happens when all the worlds cities are completely full of the highest skyscrapers that man can design. And the population keeps increasing... then what happens... prices start to move exponentially again, and we start to build highrise across the entire planet. What happens then? Eventually Earth will look like Coruscant and then it's time to inhabit other planets, but that is a topic for another thread

http://en.wikipedia.org/wiki/Coruscant#Overview

(EDIT: I have started a new thread about Megacities here... http://www.somersoft.com/forums/showthread.php?t=38322 )

Cheers,

Shadow.

 

[JIT]

Only if the seller can convince a buyer to come up with 3 times the amount the house cost in 1990.

Good point. Perhaps the person who can no longer afford to buy the 700k or 800k place might downgrade their expectations and buy the 600k one instead?

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

As I said above, someone wealthier, buying something more 'affordable', relatively speaking, for them.

They may even get money from their wealthy baby boomer parents!

 

[JIT]

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.

I agree, Australian cities are evolving into the so called 'Super-star Cities'.

 

[yieldmatters]

If the buyer is an Owner Occupier buying 2nd or 3rd property, they get the money from the sale and increased equity in their previous houses.

And when they sell their previous houses where will the buyer of these houses get the money? (we could go on and on)

The point is money doesn't grow on houses - it comes from somewhere. Hence your point below is a good one.

Bottom line ... somebody, somewhere, will have the money.

Plotting a time series and arguing it will just keep following history isn't very convincing. Higher density is a logical argument so I think we have a meeting of minds here.

 

[Shadow]

Higher density is a logical argument so I think we have a meeting of minds here.

'In 1800 only 3% of the world's population lived in cities. By the 20th century's close, 47% did so. In 1950, there were 83 cities with populations exceeding one million; but by 2007, this had risen to 468 agglomerations of more than one million. If the trend continues, the world's urban population will double every 38 years, say researchers. The UN forecasts that today's urban population of 3.2 billion will rise to nearly 5 billion by 2030, when three out of five people will live in cities.'

http://en.wikipedia.org/wiki/Megacity

Cheers,

Shadow.

 

[FHB]

It goes down the line. ALL properties get more expensive. That's the ripple effect.

Though long term it can keep rising, it won't be a straight line. Eventually there will be a recession, resulting in job loss and credit tightening. Then the market will stagnate or fall, maybe for years, before resuming it's long term trend.
Alex

No, you're right, but we are discussing the long term trend that in theory does grow in a straight line, on a log chart.

Is that trend based solely on time passing, ie. 'property doubles every 7 years on average', or does inflation and other one off events play a part?

 

[FHB]

If the buyer is a First Home Buyer, they don't buy this house. They buy something cheaper even further out. Or they rent it from the investor. Remember that in the 17 years since the first sale, this house is no longer an outer-suburb house. It is not appropriate for a FHB to expect to be able to afford it.

No FHBs don't have a right to buy a particular house, but when the upgrader goes to sell, eventually at the bottom of the chain is a first time buyer, investor, immigrant or downsizer. If these people aren't paying higher prices for the entry level house, the upgrader won't have the equity to upgrade to the $600k house, and the upgrader selling the $600k house won't have the equity to upgrade to the $750k house. The impact of affordability constraints at the bottom of the market may mean that upgrader will need to find other sources of funds, either more debt, using investments, working longer, etc. These are one off effects though, IMO.

 

[JIT]

No FHBs don't have a right to buy a particular house, but when the upgrader goes to sell, eventually at the bottom of the chain is a first time buyer, investor, immigrant or downsizer.

But what about a 2nd home buyer, ie. another upgrader?

Someone upgrading from a 400k house to a 600k house?

Didn't you and I go through this on GHPC?

 

[HandyAndy888]

Only if the seller can convince a buyer to come up with 3 times the amount the house cost in 1990.

I am soooo sick of hearing statements like this. Seriously people, supply/demand....remember these two words, supply/demand...supply/demand, supply/demand, I hope you dream about it...

Just keep in mind that a person in 1990 paid three times as much as a person in the 70s...

 

[FHB]

Good point. Perhaps the person who can no longer afford to buy the 700k or 800k place might downgrade their expectations and buy the 600k one instead?

So instead of the upgrader being able to sell their property for $500k (using kiethj's example here) and using a $200k mortgage to upgrade to a $700k house, he may only sell his house for $400k, due to the effect of buyers further down the chain not being able to keep up with the 10%pa growth rate that allows property to double every 7 years.

I guess the effect here is that prices could still go up at 10% for a reference property, people would just be borrowing more to get less on the upgrade. Or each upgrade step will be smaller than it use to be in regards to location or quality of the property. I'd expect this to pull the median number down with it.

 

[lizzie]

We end up with a two tier system.

very interesting comment. i'm currently reading donald trump where he is adament that america - and other western societies - are shortly going to end up with two tiers of wealth due to many reasons including consumer, increased spending on liabilities, lack of control, a large bubble of baby boomers gearing up to retire with very little funds - and the usa medicare and social security system already way past bankrupt. apparently the cost to the usa on their medicare and social security per year is more than the entire bonds/share market holdings. something along the lines of 17trillion - but that's probably increased since the book was written.

two tiers: rich and poor.

no middle class, as those who currently "have" (assets and financial ability) will get richer, in his opinion, and those that "have not" will get poorer due the the above reasons. nb: emerging socities like china and india are growing their middle class but this class is disappearing in developed countries.

so, does that mean that those who have the ability will end up with the affluent properties to live in and the lower rungs of properties for renting - and those who do not have the ability will be perpetual renters?

wonder what will happen with the upgrading middle class?

interesting concept. i know what side i want to be on ...

 

[JIT]

I guess the effect here is that prices could still go up at 10% for a reference property, people would just be borrowing more to get less on the upgrade. Or each upgrade step will be smaller than it use to be in regards to location or quality of the property. I'd expect this to pull the median number down with it.

Maybe, I don't know.

We could be over-analysing things!

 

[BoatBoy]

So instead of the upgrader being able to sell their property for $500k (using kiethj's example here) and using a $200k mortgage to upgrade to a $700k house, he may only sell his house for $400k, due to the effect of buyers further down the chain not being able to keep up with the 10%pa growth rate that allows property to double every 7 years.

.

So if there are buyers who cant afford $500k and buyers who can afford $700k, why could not one of those buyers decide to buy the $500k house and lower his/her expectations or put renters in it?

Dave

 

[FHB]

I am soooo sick of hearing statements like this. Seriously people, supply/demand....remember these two words, supply/demand...supply/demand, supply/demand, I hope you dream about it...

Just keep in mind that a person in 1990 paid three times as much as a person in the 70s...

Not they didn't they both paid a similar amount relative to their income.

supply and demand doesn't increase a person's ability to pay more relative to their income.

 

[JIT]

So if there are buyers who cant afford $500k and buyers who can afford $700k, why could not one of those buyers decide to buy the $500k house and lower his/her expectations or put renters in it?

Dave

Maybe the guy who would have sold his property for 700k no longer has a buyer and has to sell it for say 600k now?

At the end of the day someone has to pay for it, either the low-income FHB down the bottom, or the high-income executive with prestige property at the top end...!

Perhaps a bit of both? Perhaps the low-income FHB first, then later the high-income executive?

I'm staying somewhere in the middle for now.

 

[FHB]

So if there are buyers who cant afford $500k and buyers who can afford $700k, why could not one of those buyers decide to buy the $500k house and lower his/her expectations or put renters in it?

Dave

We we were discussing the upgrader who sold their home for $500k using the equity growth to fund his upgrade to a $700k house. It wouldn't make a lot of sense for an upgrade to buy a house for cash at the same price he just sold. If they did it wouldn't have an upward effect on prices, would it?

Edit: the point is that equity growth in a property comes from somewhere, normally a FHB or upgrader further down the chain willing to pay more than they use to, relative to income.

 

[FHB]

Maybe, I don't know.

We could be over-analysing things!

Yes, maybe we are, but I find it interesting to work out the mechanics of how house price growth occurs, especially when it appears to defy gravity.