I would have to agree that anyone thinking price drops cant happen are a bit dilusional. But the majority of investors on here dont think that. Market movement is part of the big picture. This has been the case for many cycles.A backward movement is values in the short term is not reason to sell.
will house prices continue to double every ten years?
- Thread starter keneth
- Start date
I would have to agree that anyone thinking price drops cant happen are a bit dilusional. But the majority of investors on here dont think that. Market movement is part of the big picture. This has been the case for many cycles.A backward movement is values in the short term is not reason to sell.
re
As an investor, I am very fearful of buying at the moment. First of all, the yield is quiet low interms of cost and rent. But thats due to the amazing increases of prices throughout Melbourne.
Even out in places like Ringwood, Nunawading, Forest Hill - so very ordinary suburbs. A good sized house would cost at least mid 500s or even 600s. For an investor, I would need about 20% deposit, + other costs, so roughly 110K + to just enquire. Of course, saving up 110k is not so difficult for people like us, but its no small feat for people on average wages. Mind you, that 110k must be saved from post tax earnings.
There is an article on the age the other day claimed that rent would go up in 2011. I am hopeing then there would be better reasons to buy again. But for the moment, I would just load my money into the offset account.
Warrenkh.2010
As an investor, I am very fearful of buying at the moment. First of all, the yield is quiet low interms of cost and rent. But thats due to the amazing increases of prices throughout Melbourne.
Even out in places like Ringwood, Nunawading, Forest Hill - so very ordinary suburbs. A good sized house would cost at least mid 500s or even 600s. For an investor, I would need about 20% deposit, + other costs, so roughly 110K + to just enquire. Of course, saving up 110k is not so difficult for people like us, but its no small feat for people on average wages. Mind you, that 110k must be saved from post tax earnings.
There is an article on the age the other day claimed that rent would go up in 2011. I am hopeing then there would be better reasons to buy again. But for the moment, I would just load my money into the offset account.
Warrenkh.2010
I had an article linked this morning which solidifies my belief that continued doubling of house prices will not be possible in the near term.
I believe this quote sums up the argument I have been making in this thread, but in a much more succinct manner:
The article goes onto describe changes in the mortgage/credit industry over the last 30-40 years. Link to the article, earlier article which adds to context here.
On a multiple scale household income is clearly lower than in comparison to a single wage; however housing as a multiple of both household and single income has remained relatively constant (both rise/fall in tandem). If a change in household income has had the effect that you are both suggesting then we should have seen a disconnect between the way housing acts as a multiple for both (for example we should have seen housing rise as a multiple of single income, but stagnate or fall as a multiple of household income, if either of you can show me on the chart where this happened please be my guest).
Further to this female participation in the labour market has increased, but at the same time we have seen a decrease in male participation:
- Prices have doubled every 10 years prior to 1970
- They were doubling due to fundamental reasons as opposed to the predominant effects of inflation or credit growth
If population increasing was to have such a large effect on house prices then surely that must be an indication of supply not meeting the demand from new additions, however all data that I have looked into has shown an oversupply over the longer term (clearly the last few years differ, but suspect this is only a short term occurrence):
Granted this has come with a reduction in the number of people per household, but still I cannot see any evidence of population having contributed to significant increases in house prices over inflation/wage increases on a longer time frame.
To continue to increase in price above the rate of inflation the market needs to continually convince the next generation of buyers that there are further gains to be had. In my opinion if you are investing at today’s prices then you are either:
- Doing so in way that creates instant equity or profit from rent (Nathan on this forum has shown time and time that there are still some opportunities out there, although seemingly far and few between and in areas that I would consider high risk, e.g. regional, damaged buildings/major renovations)
- Think that housing will continue to increase at a faster rate than wages/inflation (if you think this then I would love to hear your reasoning or expected driving factors)
- Are simply oblivious to the fact that housing is overvalued in almost every metric available for us to measure it (ignorant to the risks)
I know that the doom and gloom parade have been through this site before, the fact is that some of their arguments even going back to 2007/2008 ring true, however the housing correction was put off by the government injecting stimulus and record low interest rates (and in the process made the situation even worse by encouraging buyers into the market who knew no better and who otherwise would not have been able to afford to enter the market for sometime). All I can do is ask anyone thinking of investing in the property market at today’s prices, make sure you: understand the risks, have a buffer to ride out what could be a very extended downturn (in comparison to anything seen in the last couple of decades) and look over historical figures/data with an OPEN mind before making your purchase.
I believe this quote sums up the argument I have been making in this thread, but in a much more succinct manner:
The article goes onto describe changes in the mortgage/credit industry over the last 30-40 years. Link to the article, earlier article which adds to context here.
I think I briefly touched on your posts earlier in the thread, but have since come across a couple of graphs which clearly indicate that household income has not been a huge contributor to change in prices:
On a multiple scale household income is clearly lower than in comparison to a single wage; however housing as a multiple of both household and single income has remained relatively constant (both rise/fall in tandem). If a change in household income has had the effect that you are both suggesting then we should have seen a disconnect between the way housing acts as a multiple for both (for example we should have seen housing rise as a multiple of single income, but stagnate or fall as a multiple of household income, if either of you can show me on the chart where this happened please be my guest).
Further to this female participation in the labour market has increased, but at the same time we have seen a decrease in male participation:
keithj, have not had a reply regarding proof of prices doubling every 10 years for the period 1890 to 1970 as you suggested they did... The first article I linked in this post described events/factors (mainly credit and taxation linked) which have contributed to the rise in prices from this date, so would be interested to see how you (or anyone else that thinks the same) have come to the conclusion that:
- Prices have doubled every 10 years prior to 1970
- They were doubling due to fundamental reasons as opposed to the predominant effects of inflation or credit growth
If population increasing was to have such a large effect on house prices then surely that must be an indication of supply not meeting the demand from new additions, however all data that I have looked into has shown an oversupply over the longer term (clearly the last few years differ, but suspect this is only a short term occurrence):
Link to ABS
Granted this has come with a reduction in the number of people per household, but still I cannot see any evidence of population having contributed to significant increases in house prices over inflation/wage increases on a longer time frame.
Fantastic post Graemsay, couldn’t have said it better!
To continue to increase in price above the rate of inflation the market needs to continually convince the next generation of buyers that there are further gains to be had. In my opinion if you are investing at today’s prices then you are either:
- Doing so in way that creates instant equity or profit from rent (Nathan on this forum has shown time and time that there are still some opportunities out there, although seemingly far and few between and in areas that I would consider high risk, e.g. regional, damaged buildings/major renovations)
- Think that housing will continue to increase at a faster rate than wages/inflation (if you think this then I would love to hear your reasoning or expected driving factors)
- Are simply oblivious to the fact that housing is overvalued in almost every metric available for us to measure it (ignorant to the risks)
I know that the doom and gloom parade have been through this site before, the fact is that some of their arguments even going back to 2007/2008 ring true, however the housing correction was put off by the government injecting stimulus and record low interest rates (and in the process made the situation even worse by encouraging buyers into the market who knew no better and who otherwise would not have been able to afford to enter the market for sometime). All I can do is ask anyone thinking of investing in the property market at today’s prices, make sure you: understand the risks, have a buffer to ride out what could be a very extended downturn (in comparison to anything seen in the last couple of decades) and look over historical figures/data with an OPEN mind before making your purchase.
Absolutely. I think you should factor in long-term growth rates of say 3% and see how you fare on that. 3% means your property doubles every 24-25 years.
Haha you don't look too happy
Try this smiley
Try this smiley
Haha you don't look too happy
Try this smiley
I think its
when i know i can retire and: when i have retired. Actually truth is retiring early sounds boring to me. If i can slow down at 50 or have a change. Maybe travel and work. Well then that sounds great to me. Stopping cold turkey. Not interested.I agree this would be a reasonable target to factor into a long term plan from here, but the important thing to remember like Graemsay said, make sure you can hold it for long enough to realise this target. While over 25 years you might get a doubling of prices from here it might be with a decade long dip/stagnation in the middle so you have to be prepared to hold out the entire time, potentially passing by any other opportunities that may arise in this timeframe…not a pleasant thought in my mind, especially if you were holding it heavily negatively geared!
Do you mean the average price of all houses in Australia or the average price of all the houses in any capital city, or do you mean specific houses that we SSers actually buy ? There is a huge difference.....
I thought we had agreed that there are no accurate stats for the last 120 yrs ? All we have are anecdotes about specific houses - I've posted about my granny before.... she recently sold the house she was born in for $1.5M - she's 92. Her parents built it on the v. edge of Sydney in the boondocks back in 1900 or so. IIRC it's experienced 10%+pa for the last 110yrs. It's one of the cheaper houses in that suburb (it's unrenovated) - many are 50% more and wouldn't have existed in 1900. Obviously the composition of all Sydney houses has changed in that period as lots of cheaper houses have been added to more distant suburbs.
The bubble theorists say that house prices shouldn't grow at more than inflation or wages growth or disposable wages growth. IMO that's overly simplistic. My view is that they've tended to grow at close to disposable income, which is +5-6%pa over the last few decades, with wages increasing faster than CPI. The banks ensure we can afford the repayments in the 1st yr and it becomes increasingly easier over successive years.
It should be easy to see that even though the citywide median grows at X%pa, specific houses become more desirable as they get relatively closer to the CBD and tend to grow at X+N%.
Elasticity of demand & composition of households makes most shortage analysis rubbery in the short term - people tend to share or board or move back with parents etc in uncertain times (like now), and spread out in good times; family formation is happening later, and separations are more frequent. In the long term, increasing population will mean more houses get built in inferior locations, thereby making our existing specific houses grow faster than the city average.
The affordability of a 30th percentile house for the 1st home buyer demographic has never been better according to the RBA in 2009. That's a particularly relevant metric IMO. It must be possible to make up a significantly more relevant metric that includes saliant points such as population growth, IRs, average mortgage levels, 30th percentile house prices, average disposable household income, credit availability, unemployment rate, forecast GDP growth, consumer confidence etc. Rather than the misleading credit/GDP or median wages/median house prices ratios which don't reflect reality.Graemsay said:
Are people saying that ? They're saying in the long term it's hard to see a fall.... in the short term most don't really care.... unless they want to buy some more. However, with the current full employment it's hard to see any significant short term fall.Graemsay said:
Irrelevant. There are many relevant causes (see above) other than just those why Australia & others are experiencing different outcomes.Graemsay said:
Agree - the long term is a one way bet. The ability to hold in the short & medium term is good risk management.Graemsay said:
Not really. If popln growth was 0%, then I'd expect houses prices to increase at roughly the disposable income growth rate (~5-6%). However, popln growth of +1.5%pa means existing houses become more desirable and can be expected to grow faster.
Convincing the next generation is irrelevant. Inflation & increasing discretionary income will allow them to afford it. Think back a couple of generations when houses were at a v. unaffordable ~$10K(?), if you told anyone back then that the Sydney average would be > $0.5M they would have needed a lot of convincing.
The house my parents bought in about 1958 was so unaffordable at around two thousand pounds that they had to get in a boarder to help make the payments
But it was better than the besser block garage they had been renting from Dad's brother (with three kids under three).
In 1966 they sold it because "everyone" told them houses would not increase in price enough for them to bother to keep it. They could have kept it by then and used the rent to pay the loan. It would be worth $1.5M now, but that just happens to be because it is in a very desirable area. They always kicked themselves over that one.
Agreed. I irk at the thought of negative gearing. However, I don't like to chase traditional properties that positive gear but are found in whoop whoop. For me the ability to tap into significant capital upside is still a priority. However I like to think I'm doing so while making money out of holding.
As I mentioned in another thread, high capital growth in prime locations and high yield (beating new outer suburbs) are my favourite types. It is more time consuming and draining to achieve teh returns especially when working, but that's why I don't view my properties as passive investments.
As for what keithj said, there's merits to it and I'm not a strong believer of a bubble. Prices can grow beyond inflation because population expands quicker than the supply of well-located properties. It simply can't keep up because within 5km, all the land is mostly utilised. The supply of vegetables is much more elastic and so are many other goods, so it is possible for inflation to stay below land price growth (as keithj mentioned and as most economists here would understand).
We can keep harping on about how we'll use acres of land 30km outside the CBD to build new houses, but that is not happenning. Not only that, inner city has reached its apex. A wave of legislative and planning changes are needed to help this society go upwards and downsize. People's mentalities need to change rather than cry about how unaffordable this country is, because they all want to live in 350sqm+ double-storey townhouses with front / backyards. Having travelled to several places in Europe and Asia you'd find that people live in much smaller spaces and often in Asia live in 80sqm for $1m. Not on land mind you, but on strata title. Value continues to be had in land here and overseas buyers don't flock here to buy because they want to launder their money (though that is partly the reason for some), it's because they see value. For what you pay, you get a decent sized investment in a politically stable environment.
Globalisation will drive this away and we will all be shifting towards the Asian model. For those with land closeby (within 5km), it'll pay off. For those who think this is overpriced and will all crash, we'll see. For me, globaslisation, limited land in prime locations, a mobile global work force seeking lifestyle plus opportunities and population growth will eventually solidify the land values and by the time people adjust to the equivalent of unaffordable 750k apartments within 10km, it's too late.
In 10 years time I do not believe prices will be as high a multiple of single/household income as they are today (e.g. in real terms I think it's likely they will be lower in price than today). In nominal terms I think a doubling of median price in any capital city (using Q1 2010 as a starting point) is unlikely unless we experience very high inflation.
Are you suggesting that SSers purchase better than the market as a whole? Pretty big generalisation right there if so. Don't get me wrong, there are clearly some on here that turn a great property deal, but I have seen some shockingly bad buys in my time here also.
Well I thought so, but this comment of yours came 4 hours after your comment that Stapleton's price data may not be accurate: "we've had booms (or doubling in house prices) for decades (a dozen or so). Only the most recent had 'easy credit' as a contributory factor. The point I'm making is....We've had many instances of doubling of house prices without easy credit."
So you claimed that the price data I supplied may not be accurate, but then went onto claim that for the last dozen decades we've had doubling of prices every 10 years, driven by fundamental rather than credit...this is what I was looking for you to backup with data? Or perhaps retract?
As mentioned earlier, prices have increased significantly against household disposable income over the last couple of decades, they rose 60%+ in this metric, I wouldn't really call that close to disposable income growth.
http://christopherjoye.blogspot.com/2010/06/release-australian-home-prices-46x.html
Currently 4.6x according to this article by Joye. Looks to have been around the 2.7-2.8 mark mid 1990s or around a 65% increase.
This is not sustainable growth, if it is then where are you suggesting housing stops as a multiple of household disposable income? 6x? 10x? 50x?
keithj, suggest you read through the article I linked this morning, it discusses affordability then vs now in depth and argues the case better than I would be able to:
http://www.unconventionaleconomist.com/2010/07/housing-affordability-then-and-now.html
Particular attention to Chart 4: Ratio of Average Mortgage Interest Payments to Disposable Income...this particular chart shows quite clearly that housing is less affordable now even with the lower interest rates.
I have no doubt that specific suburbs are able to increase at a higher rate than inflation, but if the market is adequately supplied with housing with some beating inflation, some around the same as inflation and some less than inflation (those in areas with lower demand) that does not seem to allow for the national figures to increase like they have against wages....we have seen higher than disposable income growth in the crappy suburbs as well as the blue chip/sought after suburbs.
You could be right on a longer term basis, but we are talking decades away with those sorts of changes, where we have a credit crisis that is real, it's here right on our doorstep and all it could take is a couple of bad policy changes (or any number of other events) from the government for international investors who are enablers of our overpriced market (through providing credit) to turn away and for the entire ponzi price system to collapse. In my opinion the potential negatives far outweigh the positives for a purchase today. You may be better off taking your capital to the Casino and rolling the dice, at least it won't eat away at your pocket constantly like a negatively geared property would.
Absolutely not. I think you've missed my point completely.
The composition of the statistical population of houses in Sydney has changes every time a new suburb (or house) is built. My granny forebearers bought the cheapest crappiest house in 1900 a whole 15km from the CBD for peanuts. Today that house hasn't moved an inch in 110 year. However, Sydney has moved - instead of covering a 15km radius, it now covers a 50km radius. There are 10x(?) as many houses - the composition of Sydney's statistical population of houses has changed. Her house is no longer the cheapest crappiest least desirable house in Sydney, it is in the top 10% of houses. It's managed to grow faster than the average, because cheaper houses have been added to Sydney.
That's what I meant when I said above that there's a difference between a specific house that an SSer buys and a citywide average that has cheaper houses added all the time.
The theorists who look at only averages or medians may be right - median house prices may not double in 10 years. However, NOBODY buys the medians, because many of the houses that will make up the median in 10 yrs time haven't been built yet. Therefore the headline median is irrelevant to property investors. Property investors buy specific houses, that slowly get further from the periphery, and relatively more desirable.
The title of the thread is ambiguous - does it mean median prices, or the price of the specific houses that we buy.
So can we agree that we have no reliable stats dating back 100 years, and we need to reply on anecdotal evidence from specific examples ?.... like the one I've supplied.
Have a look at how much discretionary income has increased over and above disposable income. Much of that is directed towards increased mortgage repayments.
Sure, it's not sustainable to infinity, but infinity isn't a timescale I'm worried about. Using such a ratio for forecasting a flattening or decline has a huge margin for error. Other factors/ratios are far more significant.
The Median House Price to Median Income ratio isn't a particularly useful ratio - it just happened to work for a brief period at the end of the 20th century. Debt to Household Income ratio, or Interest Payments to Household Income ratio, or 30th percentile House to Median Household income of the FHB demographic are more useful and better reflect the reality of existing equity and interest rates. Or even better, break it down into quintiles as the RBA has done - see below.
Have a look at the RBA, pay particular attention to Chart 4 & 5. It gives detail about who actually owes & repays the debt rather than an Australia wide median. According to the RBA the top 20% of income earners hold 50% of the debt. The bottom 20% of income earners only hold 3.5%. It shouldn't surprise anyone that those who can afford to repay the debt have the debt. Graphing average debt to average interest payments is misleading and fails to reflect reality.
A far better ratio than Average Mortgage Interest Payments to Disposable Income is the affordability of a FHB house (30th percentile) to a median FHB income. And the RBA told us last year that that measure was the best in a generation - see RBAs graph 6.
PS I failed to get though the whole of the link you gave - it's to long winded & and is an example of how high level theory fails to reflect practical reality.
I'm not sure that we will find much common ground with our thoughts so don't have much to add, however I find it pretty funny that property bulls have often used medians, averages, etc as a metric to measure how successful property has been over the last decade and now when it seems it won't work they have to change the measuring stick. Not to mention the recent change to using disposeable income to measure house price multiples, is this really an improved measurement or a trick by those with interest to hide how overpriced property is?
Western societies have had it pretty easy in the last couple of decades with cheap labour from China and elsewhere supporting our unexpensive lifestyles and gadgets, but this can't & won't go on forever.
Western societies have had it pretty easy in the last couple of decades with cheap labour from China and elsewhere supporting our unexpensive lifestyles and gadgets, but this can't & won't go on forever.
It helps me sleep easier at night knowing those with high incomes have the highest level of exposure to property debt, they are more likely to be able to take the hit. What I am most annoyed about is the government enabling first home buyers to expose themselves to the risk with the FHB boost last year. This was a short sighted move and was used by the FHBs to leverage to the max. Just hope it doesn't end in tears for the majority.
That was going to be my next response.... my stats are better than yours etc.My view is that these new measures either reflect reality more accurately, or happened to be equal to the old measures.
Absolutely... however, it'll move to Africa or Bangladesh or elsewhere in the medium term. It always looks like a ponzi scheme, and to some extent it is, but it always has been - the new entrants support the old timers, and they'll get their turn eventually. That's normal.... I'm not sure how normal it is for new entrants to feel they have the right to skip the bottom few rungs & start halfway up the ladder.
..... you can see the potential problem, FHBs can, I can, and the RBA can.... we'll see.... schedule a bump in 2 years
.would be interested in a response from you to Keith's first point re median vs a specific house. if you take his granny's house, it's pretty clear that the massive inrease in value it has seen has more to do with the city growing and much less to do with a credit bubble. This illustrates exactly why property can and does outstrip wages growth and I would genuinely love to know if there is any other point of view on it
The same can be said for my regional property. My 60+ yo property would have been just an average one when built. Now it is considered a CBD property and holds a higher value for this reason. The average homes are now much further away.
only that it supports 'property in the long term'.
The problem that i foresee is that the majority of residential property investors have been programmed to believe that property doubles every 10 years.
Its like any asset class that has shown good growth over recent times, it pulls in the the 'weaker' players like a vacume cleaner. Those weaker players buy on the expectation that recent performance will continue indefinately into the future.
If this expectation fails to occur, they become disillusioned and sell, just as likewise weakplayers are selling at the same time.
Over time, if price weakness persists (one doesnt need massive drops in prices, just stagnant prices), the marginal propensity to buy by owner occupiers declines as well which adds additional drag to the market.
Now i know i know, the general market is just the aggregate of the various submarkets, but let me tell you when the general market is stagnant, its far harder (but not impossible) to create significant returns in the submarkets.
This is where i think it pays to invest in multiple asset classes, you gain alot more insight into market pyschology.
Those who have exposure to shares should know what i mean by now.
Indeed. Western society can't and won't go on forever as the pre-eminent first world countries that they are. The growth will not happen here but in the emerging economies as they play catch up. The real property gains will be in the Asian giants and of course by this I am talking about the likes of China. Not sure why we're all so hung up about such a small place. Perhaps it's fear of the unknown, or just pure stubborness.
Also agree with Ausprop - as such the median price actually understates the extent of the growth in established areas, which alludes to an earlier post of mine which talks about a limited supply within 5km of the CBD. I'm sure 100 years ago 5km from the CBD would be today's fringe suburb. The growth in prices is not just a reflection of change in salaries - it's a reflection of greater circulation of monies flowing around the economy and a limited supply of land within a certain radius. Also if you want to be precise, what's the impact of the upper 5% of population experiencing exponential salary growth compared with the median salary which is being dragged down by people on mediocre income targetting fringe suburbs? To take an extreme example, I'm sure China's average salary has not moved enough (perhaps it's doubled?) to support the 10-fold increases of inner city prices of many major cities including Shanghai, Beijing, Tianjin, Guangzhou, Wuhan, Shenzhen, Chongqing, Chengdu, Hangzhou Qingdao etc which in many locations rival Sydney and Melbourne.
keithj’s example was over a 110 year period, he provided the example that previously the property was on the fringe and now is a highly sought after inner suburb. I’m not denying that such a house could increase in value relative to other properties further out from the city. What sort of premium does that justify? It should be represented as suburb x (further out) + x%. Prices simply cannot be justified at current levels in the other metrics we have available to measure them (e.g. comparison to wages, other assets, etc).
IV, IMHO this is spot on. No doubt there is still a lot of “old” money in the housing investment arena, but there have been a lot of newcomers in the last 10 years (indicated by the increasing number claiming NG tax benefits). What happens when they realise that the gains of past won’t be had in the future? Will they exit their positions? I suspect so. They played leap frog to the top and if things turn south then they will start leap frogging each other to the bottom.
A lot of the old money (e.g. boomers) could possibly want to exit their property positions to fund their lifestyles (infact of late I have seen a few posts on Somersoft with children buying their parents properties), with a recent correction in the share market their super and share accounts have taken a hit…if they start selling along with the new money who aren’t making the expected gains all hell could break out loose here just as it has in other countries with recent property bubbles.
