Will Australia's next property boom be the greatest boom we've ever seen?
- Thread starter Shadow
- Start date
There are a few posters here who seem to think they have, some of the theories are:
- supply demand drives price growth
- prices follow a long term trend line based on time passed
- prices follow a long term trend line based on time passed, and effects of inflation
- prices follow wages
- prices grow faster than wages thanks to increasing equity
- prices grow faster than wages due to increased total household income, increased employment, lower interest rates and greater availability of credit.
- etc.....
Where you guys continually fail in your efforts to disprove supply/demand arguments is that you automatically take the stance that the individual in question cannot have the cash in hand in order to pay the higher price that lack of supply and higher demand have resulted in.
Remove that premise for a minute and make assumptions that there is low supply, and enough people WITH the cash to create high demand and you have no argument.
Trying to disprove whether there are enough people WITH the cash is a nonsense argument. There are any number of variables that could effect that and they are well beyond being predictable.
At some point the cost increases will reduce the number of people with enough cash, thus reducing demand while supply increases and we have a flat period.
YM. You say you have a lot of demand for a Red Ferrari but one doesn't appear. That is "individual demand" of someone without the financial capability (or true desire) to supply that demand. It does not discount that there is a large demand for supply of Red Ferraris for those in a position to afford them.
These self centric opinions are where your arguments are flawed.
Cheers,
Arkay.
Remove that premise for a minute and make assumptions that there is low supply, and enough people WITH the cash to create high demand and you have no argument.
Trying to disprove whether there are enough people WITH the cash is a nonsense argument. There are any number of variables that could effect that and they are well beyond being predictable.
At some point the cost increases will reduce the number of people with enough cash, thus reducing demand while supply increases and we have a flat period.
YM. You say you have a lot of demand for a Red Ferrari but one doesn't appear. That is "individual demand" of someone without the financial capability (or true desire) to supply that demand. It does not discount that there is a large demand for supply of Red Ferraris for those in a position to afford them.
These self centric opinions are where your arguments are flawed.
Cheers,
Arkay.
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Yes, it does, because it forces them to spend less of that income on plasma TVs, cigarettes, booze, pokies, nice cars, foreign holidays. It forces them to save for a bigger deposit and take out a 40-year or interest-only mortgage. It forces them to buy a smaller property to get on the property ladder. It forces them to use shared mortgages. It forces them to buy an investment property before their PPOR. It forces them to borrow some 'equity' from their parent's house. It forces them to work longer hours or get a higher paid job. There are many many ways and means of getting the money. The population is increasing faster than the number of new houses being built. People need to live somewhere. The money will be found. Those that 'can't' (i.e. won't) find the money will continue to rent and complain about the unaffordable property prices. However the buyers will find the money and just keep buying that unaffordable property, because it's not going to get any cheaper...
Yep, I accept there may be other ways to increase people's buying power faster than income growth. I have stated this many times.
But if these increases are one offs, like the drop in interest rates or changes to multiple income households are. You can't give up cigarettes every year to increase your income, its a one off boost to purchasing power. I agree we could come up with a new item to give up each year so the effect can be repeated. In which case we might get prices to grow at 2% over wages, this would line up nicely with AMP's chart.
At this point in time you are correct - they do have the cash (or they are getting it via debt). If they didn't we wouldn't see the prices we are seeing. So I don't assume away their access to cash NOW.
What I am arguing is moving forward the house prices can not outstrip incomes continually because you will hit a point where there simply isn't enough money to fund it.
I disagree with building a "historical trend line" analysis and then projecting it forward. I think it's nonsense as it misses hard limits that are obviously there. Do you think it's possible if the median house price was $1.5M when people earned $80K?? Of course it's not possible.
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Keep projecting this world forward and you get to a ridiculous place. What happens when house prices are so large that the interest payments are more than my disposable income?
I'd stick to the higher density argument. It was logical.
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I'm not trying to disprove demand, I've seen it first hand. And I agree that at the moment people have enough money to meet the demand. Explains why prices are going up.....
I also agree with your suggestion that at some point cost increases will reduce the number of people with enough cash, thus reducing demand while supply increases and we have a flat period. This could be further extended to other situations where income reductions (ie. drops in employment over time) reduce the number of people with enough cash, thus reducing demand.
I'm not trying to disprove prices go up and down over time for different reasons, it would seem a totally ridiculous position. Of course prices can diverge from the trend for periods of 10 or 20 years.
The discussion is; over the long term will prices rise by time (ie. double every 7 years), or will low inflation/wage growth create constraints?
Lenders will introduce a new credit product based on generational debt - 100 year loans. Span the debt over your grandkids life time.
Can't you already do this with IO loans?
I'm not talking about projecting this forward forever. But we can project it forward for a long time, at least as long as the majority of investors on this forum will be in the market. The move to very high density living will happen, but it will take a long long time. And some areas of our large cities will object so much to higher density that it just won't happen. Eventually, as I said before, only the investors, or super rich will buy in the cities, as has already happened in Manhattan, Central London & Paris etc. Median prices right across countryside Australia may not increase exponentially so long as there is new land to be developed, but in the big cities, prices will rise exponentially for a long time, because there is no more land, and the people already living there object to any higher density development. This is another one of the reasons why the next boom in our large cities will be even bigger than the last one. (There... now I've mentioned three of the reasons...)
As you say... 'Keep projecting this world forward and you get to a ridiculous place'... yes, I agree, and many of the world's cities are already in that ridiculous place. Australia is heading there too.
Cheers,
Shadow.
New credit products will more than likely come out eg. the Cashflow Loan where you pay smaller interest up front and the remainder capitalises. Who knows, this may become a mainstream loan in 20yrs.
50yr (or 100yr) mortgages wouldn't make much difference as it's the interest portion of loans that makes it unaffordable. 100yr mortgage would only move to decrease the Principal payment, but you still have to pay the interest of 8%pa (or what ever the rate is) on the debt.
50yr (or 100yr) mortgages wouldn't make much difference as it's the interest portion of loans that makes it unaffordable. 100yr mortgage would only move to decrease the Principal payment, but you still have to pay the interest of 8%pa (or what ever the rate is) on the debt.
It would seem logical that wage growth can create constraints when you look at the market as a whole. Obviously not everybody (that is reliant on wage income) can continue to fund the higher costs of growth properties. But measuring how it may be effected by lack of credit etc is a difficult task at best.
Personally I don't feel that it is of particular concern to the investor. The investor is interested in the growth properties that can and will continue to grow due to lack of supply and increased demand. That demand will not come from the average homeowner and certainly not from a first home buyer. The appeal and status of a suburb attracts financially well do to people and the limits of their buying power can not be compared to wage growth and will likely not be effected by it.
Graphs predicting median growth are not particularly factual of an individual portfolio. They're a rough estimate that can be used as a guide. Half the population will be doing worse than the median, half better. The goal is to be in the better half. The validity of extending such a graph is up to your own beliefs. I for one believe that historical indicators are the best you will get. Even at CPI property growth and leverage when well managed can get you ahead over the long term. Even if only by a delayed gratification, controlled and enforced savings plan. It isn't what you would aim for but you do have to factor in the monetary habits of the individual as well. Conservative investing alone will put those people far ahead of the crowd over the long term and I believe that most do very well from property.
Cheers,
Arkay.
That could be the case, particularly in cities where there is as big of an attraction to live in the city as there is in Manhattan, London and Paris. If income opportunities are high enough and lifestyle attractive enough to attract the skilled and well off, prices should match.
There are still a number of things that can change. Allowing people to access their super for deposits, for example. Or, one that I prefer, allowing PPOR interest deductions and limit (or scrap) the PPOR CGT exemption. In the US they get interest deductions on PPOR but the PPOR CGT exemption is capped at $250k for singles and $500k for couples.
It's really about political will (or lack thereof, depending on how you look at it). If the pollies perceive that rising home prices are getting to the point where it will turn voter sentiment against them......
And of course there is my favourite: increased density, and people living further out.
Alex
It's really about political will (or lack thereof, depending on how you look at it). If the pollies perceive that rising home prices are getting to the point where it will turn voter sentiment against them......
And of course there is my favourite: increased density, and people living further out.
Alex
Thanks Arkay, that's well put.
I'm not questioning property as an investment, it is obvious most people here have done very well out of it in the past.
As far as the point of this thread, regarding the next boom in a few years time being bigger than the previous one, I'm suggesting that wage growth constraints and other economic conditions make it fairly unlikely (I won't say impossible).
As you've suggested, the top 50% (or some other number) may not be inhibited by these conditions to the same degree, but those relying on income growth or equity gains based on the assumption that a future buyer will be able to increase their buying power faster than average wages, may be impacted. Conditions are perhaps not as suitable today for a boom as they were in the late 90s. That's not to say it can't happen.
This is why I think Sydney, Melbourne and Brisbane have so much potential for further growth. They are very desirable cities. Sydney has been regularly regularly voted as the World's Best City...
http://www.cnn.com/2005/TRAVEL/07/12/australia.bestcity/index.html
Isn't it amazing that a city voted as the World's Best, still has much lower property prices than many other large cities in the world.
Sydney has extreme limitations on future physical outward expansion, being surrounded by ocean on one side, and national parks and mountains on the other. So the only way to install more accommodation is to move to higher density. But the existing residents make sure that happens extremely slowly. The result... very high demand for existing property.
On a micro level, take for example Sydney's Northern Beaches. Constrained by harbour and national parks on one side, and ocean on the other. There is simply nowhere to spread out to. And the residents won't let high rise engulf their leafy suburbs and block their nice ocean views without a fight. The result... only the investors or the rich can really afford to buy there. The people with the money... the people for whom wages growth is irrelevant.
Normal people are priced out so they fight for other suburbs as close to the desirable locations as possible. They push up prices in these areas. This spreads to all the suburbs. The city has no more room to expand and prices go through the roof. Those who can't afford it move to satellite cities or into the countryside.
In the future as more and more people work from home, living in satellite cities and the countryside won't be such a big deal. Commuting will become less of an issue.
But those who can afford, the rich, the investors, will still want to buy in the city, where the action is, near the beach etc. And the prices here will just keep going up.
Cheers,
Shadow.
Changes to deposit rules and PPOR deductions are still one off increases to buying power though. Increasing density and living further out can be repeated to a point.
