Will resi really continue to double every 10 years?

[Land]

Wow - what a mixture of opinions!

Don't get me wrong, I'll be looking around for our next IP as soon as the first home buyers grant dies, because I know I can find a neutral/positive geared property which will cost us virtually nothing to hold and even if its $500K and goes up 3% a year, that's still $15,000 in the first year, which is a hell of a return on my $0 it cost me to hold onto!

Leverage definitely makes property a wonderful asset class.

In relation to my question of the doubling effect every 10 years, I think the key lies in the fact that a well selected property bought for exactly the median, in 10 years time should be above the median (pyramid effect) due to additional and further outlying housing stock coming onto the market, and therefore allow the selcted property to exceed the median growth over the same 10 year period. i.e. 3kms from the Sydney CBD becomes more and more exclusive over time, and so long as there is someone who can afford to bid up the price, it will move up.

The question is for areas on the fringe, where I literally cannot see the general lower socio-economic community being able to afford to continue to bid up prices. Until the area is no longer the fringe that it once was and attracts a wealthier community.......

 

[evand]

At 3% pa you're just trading water due to inflation. Possibly behind if inflation rises even a bit.

What makes you think your property will rise 3% per year anyway?

Don't forget, leverage is 2 edged sword.

Don't get me wrong, I'll be looking around for our next IP as soon as the first home buyers grant dies, because I know I can find a neutral/positive geared property which will cost us virtually nothing to hold and even if its $500K and goes up 3% a year, that's still $15,000 in the first year, which is a hell of a return on my $0 it cost me to hold onto!

 

[Perth Investor]

At 3% pa you're just trading water due to inflation. Possibly behind if inflation rises even a bit.

What makes you think your property will rise 3% per year anyway?

Don't forget, leverage is 2 edged sword.

But if you have a $500K property and a $500K loan, then inflation is irrelevant in the equation. Inflation that hurts your investment property will do the same damage to the loan. That's the key with using other people's money for home investment.

So at 3% per year he's making $15K per year, and inflation is is a zero sum game, as he has money on both sides of the equation...

 

[evand]

Not so sure about that. As inflation rises so do interest rates and so do your outgoings. Anyway, it all sounds great in theory, the reality is usually very different.

But if you have a $500K property and a $500K loan, then inflation is irrelevant in the equation. Inflation that hurts your investment property will do the same damage to the loan. That's the key with using other people's money for home investment.

So at 3% per year he's making $15K per year, and inflation is is a zero sum game, as he has money on both sides of the equation...

 

[quoll]

But if Sydney is to achieve its double in 10 years from 2001 in two years time then those high repayment figure I quoted must be achievable in that same timeframe. Do you think FHOBs can afford $68K in house repayments alone in the next two years and afford to live otherwise?

It's an average, it doesn't mean if you pick a year then 10 from that point will give you a doubling in value, being an average you could have a long patch of very little movement and then a couple of years where it doubles.

If inflation kicks in really well, those first home buyers just might be able to afford $68k in house payments. Just need the average wage to hit 80k.

My 2c
Cheers
Graeme

 

[MichaelW]

this question is really easy to answer over the long term.
Of course property can double every 10 years so long as peoples ability to repay their loans also doubles every 10 years.

Reflect on it.

Yep, easily so, its called inflation...

OK, lets make it real. I started work back in 1991 straight out of Uni on a very strong salary of $30K pa when everyone else was starting on $20-25K. I was just lucky...

Now, two decades on, I'm on over $200K pa. So that means my salary has more than doubled every 10 years. A doubling every 10 years should have me earning only a measley $120K pa at the moment ($30K doubled and doubled again). My wife doesn't work any more because she doesn't have to. i.e. Our "servicability" has improved to the extent that we can take a whole salary out of the equation and still afford a $1M PPOR and a $2M resi property development when I'm still a young Gen Xer in my 30's.

Its not really that hard to envisage Chiliaa...

Too many people over-analysing as usual. Inflation is your answer pure and simple, and as early posts pointed out, even if property prices just track inflation we profit big time due to leverage/OPM. Buy up big by watching your cash flow / servicability and let time / inflation do its thing. Retire on the rental income stream (yield) alone. No LOE strategies for me. Its all in Jan Somers' books. High school maths is all you need and its not predicated on bubble-esque growth. Inflation at 3% pa will do thanks for me to retire very financially free on a big passive income stream.

Cheers,
Michael

 

[Land]

At 3% pa you're just trading water due to inflation. Possibly behind if inflation rises even a bit.

What makes you think your property will rise 3% per year anyway?

Don't forget, leverage is 2 edged sword.

What makes me think it will rise 3%? Because if it doesn't over the long term, housing is getting cheaper and cheaper in real terms because it's not keeping up with inflation (which is sometimes 2%, other times 4%, but I'm just going with the RBA's preferred rate of inflation for the purposes of the exercise).

Now, how am I treading water? Assuming I put $0 into another investment for 12 months, say, direct shares, what wealth have I accumulated? That's right: zero. But if I have a neutral investment property (effectively costs me $0 for the year), and I've made $15,000, how exactly is that treading water? Now multiply this by 3, 4 or 5 properties, and it's an excellent hedge against inflation, which does all the work for me to reduce the real value of the debt against the property. I could hold them for 35 years and by then the debt in real terms will be so cheap I could pay them off easily and own a bunch of investment properties outright and enjoy my retirement living off the rent.

I am well aware that leverage is a 2 edged sword, and it's because of property's relatively stable characteristics that it's the best asset class for high LVRs. Hell, even if the value drops for a few years, what do I care because I wont cop a margin call, and I'll just wait for it to track back to, or above inflation.

The debate in this thread is whether or not property can continue to OUTPERFORM inflation by doubling every 10 years (i.e. 8% growth pa). I have no doubt at all that over the medium to long term it will always track inflation as a minimum.

Michael - I agree with you about your income increasing, or doubling, I am 30 and my income has done roughly the same thing over the last 10 years. However, I think this is similar to the 'median' house issue - your income has doubled, not the income of a fresh graduate. You said you were on 30K straight out of uni, what would you guess a graduate in the same position would be on today? I don't know your profession, but I was on 40K straight out, and 10 years later the graduates are on about 65K.

In the same way, a specific property which was a 'median' property at time of purchase can probably double in 10 years, because it does not remain a median property, but becomes more desirable over time due to location.

What do you think?

 

[tom32]

A doubling every 10 years should have me earning only a measley $120K pa at the moment ($30K doubled and doubled again).
Cheers,
Michael

Anyway heres to my first post...

120k Measley? Maybe for some.

Anyway of this rise from 30k to 200k your productivity in your late 30s is far higher than what it was when you were 23. I know this is the case for myself. This would explain the bulk of your higher salary now, not inflation. Inflation alone would have seen your wage approximately double only, i.e. you would be on 60 something thousand now. I get 68 for 5% inflation and 60k odd for 4% inflation so its somewhere between these.

Anyway on houses, I don't own a PPOR even, and was hoping for a 3 year respite to house price rises while I get a 20% deposit together.

Do you think the doubling every 10 years is only relevant for inner city houses? I don't see how in outer suburbs where new supply competes, it is possible to have another doubling in the next 10 years unless the government in the face of the recession raises taxes on development even more. I suspect they will not as it will cost building jobs?

 

[sash]

Tom,

As a rule of thumb do not target the newer outer suburbs for purchases...because I suspect you will pay a preimum for a new house.

Where you will get doubling is on the established suburbs which are consideredd outer suburbs because these over time would have a lot of infrastructure put in.

For example...older the suburbs around liverpool and parramatta in NSw are better buys than brand new houses in Kellyvile. Why???....because I can see the 310k house in Toongabbie or Merrylands double to 600k in 10 years whereas I am not so sure that a 600k house in Kellyville being worth 1.2 million.

In case you are wondering how people will afford 600k houses in ten years??
Inflation (using the rule of 72) will take the average salary in 10 years based on 4% inflation rate to about 93K from today's 60k. That means a young couple on two average salaries will be on 186K per year...and by that time the tax thresholds will also adjust. So the income after tax will more likely be something like 150k net. In case you are wondering why they are only paying 36k in tax....today they pay 46K....so a reduction in taxes by 10k over years with bracket creep is not of of the question!

So based on the above and with a mortage of say 550k at say 6.5%...the couple's repayments should be about 42K...leaving or about 28% of net income....very comfortable serviceability.

Hope this illustrates why property prices in the low end will track to inflation more closely. It is the luxury homes where the variation and value is more unpredictable...thus why the banks are more cautious on these.

Anyway on houses, I don't own a PPOR even, and was hoping for a 3 year respite to house price rises while I get a 20% deposit together.

Do you think the doubling every 10 years is only relevant for inner city houses? I don't see how in outer suburbs where new supply competes, it is possible to have another doubling in the next 10 years unless the government in the face of the recession raises taxes on development even more. I suspect they will not as it will cost building jobs?

 

[RightValue]

Hang on, I'll look back over the last 109 years of stats and see.......

Could one of the stats gurus please pick out one random house, in an inner or middle ring suburb of any Capital city in Aus, on a normal suburban street, in a decent location not far from everything, that was built around the turn of the last century, and see what it was built/sold for in that year?

Then, see what the same house is worth right now, and compare the two.

Then you will know the real answer.

For an example; pick a normal house in say; Richmond or maybe even Oakleigh in Victoria. Richmond would have been outer-suburbs in 1900, and Oakleigh would have been farmland.

That is easily done without a property to look at.

1900 to 2009 is 15 7 year periods (actually its 15 and a half .. but we won't split hairs).

Doubling $1000 15 times gives you $16.4 million..

so if a property was bought for 500 pounds in 1900 doubling in value every 7 years would make it worth $16.4m

In another couple of years, 2012 when it reaches 16, 7 year periods it is worth $32.8m.

Here is a real example George Armytage bought Como, on the banks of the Yarra on the South Yarra/Toorak border in 1863. It was 22 ha and cost him 18,000 pounds ($36k).

Next year it will be 21, 7 year periods sine he bought it.. If it had doubled every 7 years then that holding would be worth $37 BILLION ... That works out at over $160,000 for every square meter of land.

In reality the land in that area is not even worth one tenth of that price.

Yes land will often double every 7 years, but at one point the doubling will stop. In another 35 years tmie, which is 5 more seven year periods then that site should be worth $1,207,959,552,000.00; that is $1.27 Trillion.

So if anyone believes that land doubles in value every 7 years forever, they should form a syndicate and rush out and spend just $3.7 billion buying back 22ha of the original land, give everyone who now owns the land a windfall, sit back and see that $3.7 billion grow into $1.2 Trillion in another 35 years ...

After all we may just end up like Zimbabwe.

cheers

RightValue

 

[Ausprop]

Here is a real example George Armytage bought Como, on the banks of the Yarra on the South Yarra/Toorak border in 1863. It was 22 ha and cost him 18,000 pounds ($36k).

doesn't sound right - 18000 pounds in 1863 was more than 6 months wages

 

[Bill.L]

Hi all,

Right Value, the interesting thing about the como property is that at a growth rate of 6% pa over that time it would be worth $178m for the same 22ha.
Allowing a couple of ha for roads etc, the 200,000 sqm come in at $891 psqm, or in other words ~$534,000 for a 600 sqm block of land in Toorak/Sth Yarra.

Those figures being a doubling every 12 years, it suddenly doesn't look impossible and my assumption is that inflation will continue.

bye

 

[tom32]

For example...older the suburbs around liverpool and parramatta in NSw are better buys than brand new houses in Kellyvile. Why???....because I can see the 310k house in Toongabbie or Merrylands double to 600k in 10 years whereas I am not so sure that a 600k house in Kellyville being worth 1.2 million.

Thanks Sash,

I know all those suburbs well, Toongabbie in particular is one I looked at before leaving Sydney back in 04, but decided to rent for a few years while I moved around for work and save up a decent down payment.

I am 3 years out from buying, but plan to buy on my return to Sydney in 2 to 3 years.

I share your thoughts about places like Kellyville as well, as you compete with new supply. I think future stimulous packages could well include reduced developer taxes, throwing new supply in direct competition with existing. This is why if I was ready to buy Toongabbie, or better still Winston Hills, would probably be my choice right away from new developments.

Thanks again.

 

[WinstonWolfe]

Too many people over-analysing as usual. Inflation is your answer pure and simple, and as early posts pointed out, even if property prices just track inflation we profit big time due to leverage/OPM.

Today's estimated resident population is 21,850,907
1991's was 17,121,100.
3101.0 Australian Demographic Statistics
TABLE 1. Population Change, Summary - Australia ('000)

Average Pop growth
=> 1.4%pa

Average full time (ordinary hrs) male weekly earnings per week (original data)
1991 $612
2009 $1263

Average Wage Growth
=> 4.1%pa
6302.0 Average Weekly Earnings, Australia
TABLE 3. Average Weekly Earnings, Australia (Dollars) - Original
Average Wage growth rate

Repeat sale of an existing detached dwelling in an outer ring Brisbane suburb.
1991 95k
2009 300k

House Price Growth
=> 6.6%pa


CPI index
1991 106
2009 166
series 640101

CPI Change
=> 2.5%pa

House price growth has outpaced inflation by 4.1%pa,

House price growth has outpaced both wage growth and population growth, and even the combination of both.

This reflects an erosion in the amount and quality of housing that can be bought per man hour of average labour......without even considering existing dwelling depreciation.

 

[Bill.L]

Hi all,

WW, you need to include interest rates in those stats, ie 13-14% in '91 to less than 6% in 2009.

bye

 

[WinstonWolfe]

For those who think resi will double every 7 or 10 years, consider the chart below.

Most of the green area represents the funds borrowed from overseas to lend to Joe Average, to buy property.

While Aussies continue to bid up Aussie property, more of the interest we pay goes off shore. In the chart below, the red line consists mainly of interest Aussies pay for housing loans. Note that the amount of interest we are paying that goes offshore more than offsets any trade surplus we have with the rest of the world.

Australia, unfortunately, is drunk and delusional, on bidding up property ever more, not understanding that the funds we borrow and the interest we repay are evermore destined offshore.

To counter this, we need to ensure the AUD and TOT adjusted net exports are higher and higher. Ultiimately, when the music stops, Australia is on an unsustainable path.....and if it doesn't make misery of your life, it will shock the hell out of your kids.

Australian property prices are becoming ever more reliant on foreign capital. You won't hear about this from REAs, the RBA, or Rudd Inc.......no one loves your kids enough to look this far ahead.

 

[WinstonWolfe]

Hi all,

WW, you need to include interest rates in those stats, ie 13-14% in '91 to less than 6% in 2009.

bye

That's the trap for new players Bill.
Rates are innately variable, in that they are evermoreso reliant on the cost of foreign capital and AUD volatility.

That's where the future varies from the past.

If Australia is to commit to being a globally competitive economy, as Keating and Button desired, then we better start reaping a higher return from the ever greater quantity of foreign funds we are borrowing to ramp something as unproductive as housing.

Bill, would you like to explain why rates went over 10% in the 90s?

 

[Bill.L]

Hi all,

WW,

Bill, would you like to explain why rates went over 10% in the 90s?

Thanks for asking.

Simply, they did not "go over 10%" in the '90's, they started the '90's at 17%. They went over 10% in the '70's, July '74 to be precise. After they went to 10% , they only came down to 9.25% during the rest of the '70's. By June 1980 they started to rise again, 13.5% by mid 82, a low of 11.5% in 84 before rising to the 17% of mid 89.
Why did they go up?? In response to inflation combined with the new economic theory of monetarism (ie use interest ates to control money supply)

In '72 and '73 while inflation was about 7-8% interest rates were ~7%, but inflation kicked away to 14% in '74 and 16% in '75, yet interest rates peaked at 10.38% by '75.

In '86 we were Keatings "banana republic" because our CAD was hopelessly high and increasing at an unsustainable level, manufacturing was going offshore and the $Aus was falling (vis a vis $US).

bye

 

[WinstonWolfe]

Hi all,

WW,



Thanks for asking.

Simply, they did not "go over 10%" in the '90's, they started the '90's at 17%. They went over 10% in the '70's, July '74 to be precise. After they went to 10% , they only came down to 9.25% during the rest of the '70's. By June 1980 they started to rise again, 13.5% by mid 82, a low of 11.5% in 84 before rising to the 17% of mid 89.
Why did they go up?? In response to inflation combined with the new economic theory of monetarism (ie use interest ates to control money supply)


Yup, that part is right......and I should have checked my chart before I mentioned 'over 10%' ..... can anyone remember if resi investors could get fixed rates in the 70s and 80s?

In '72 and '73 while inflation was about 7-8% interest rates were ~7%, but inflation kicked away to 14% in '74 and 16% in '75, yet interest rates peaked at 10.38% by '75.

In '86 we were Keatings "banana republic" because our CAD was hopelessly high and increasing at an unsustainable level, manufacturing was going offshore and the $Aus was falling (vis a vis $US).

bye

Yup, keating was worried about the CAD at what %, and what net foreign debt?

But since, the keepers of the flame at the RBA changed their God to Pitchford, and now believe we are all consenting adults, and any CAD goes.

 

[WinstonWolfe]

THough they are still trying to fabricate a sustainable upper limit for the CAD/GDP and NFD/GDP ratios......in which time India will own our coal mines.