House Prices (again)

[monsta]

Hey,

For all of you still living in RSA, house price affordability is a huge issue here. The presidents approval rating has been suffering because if it

http://www.smh.com.au/federal-politics/political-news/voters-drift-away-from-tony-abbott-amid-worsening-housing-affordability-crisis-and-samesex-marriage-debate-20150614-ghnofr.html

It's become a good reason not to migrate to Sydney. It seems foreigners and older couples are buying up property at exorbitant prices.

[qwerty]

When reading about the current house prices, it is interesting to see how many older people suggest that the younger generation work harder to own a property (like they had to when they where younger). But then they (the boomers) did not have to content with older people and investors using property as a means of making money like the younger generation now has to (or am I wrong?).

[monsta]

You are not wrong qwerty.

Another big issue is child care. Its -+$130 per day. So, if you have young kids then sending Mom back to work doesn't get you very far.

The big issue is negative gearing. I.e. tax brraks on investment properties. It makes property a more attractive investment. Its just been used way to much in Sydney and should be stopped.

[HansaPlease]

Another big issue is child care. Its -+$130 per day. So, if you have young kids then sending Mom back to work doesn't get you very far.

$130 per day is an extreme example - probably Sydney CBD. And don't forget about the rebate - so it's only half that at worst.

What does childcare in suburban areas further outs cost? We pay just under $90 in Melbourne but get half back.

No doubt it's expensive, but it's not quite $130 per day.

[Donovan83]

This bubble is going to burst and it will all end in tears.

The level of naivety in this country is insane - "just buy now mate, it'll only go up!"

There have been property bubbles in Australia before. I think Sydney in particular is in an incredibly big, dangerous bubble... and it wouldn't surprise me if the end of the mining boom is eventually going to trickle down and eventually impact property in Vic and NSW in a big way. Scary times.

Edited June 15, 2015 by Donovan83

[benp]

This bubble is going to burst and it will all end in tears.

The level of naivety in this country is insane - "just buy now mate, it'll only go up!"

There have been property bubbles in Australia before. I think Sydney in particular is in an incredibly big, dangerous bubble... and it wouldn't surprise me if the end of the mining boom is eventually going to trickle down and eventually impact property in Vic and NSW in a big way. Scary times.

I'm not sure if what we have in Sydney can be qualified as a bubble. One of the necessary pre-condition for a bubble to form is oversupply of properties in the market, and Sydney certainly does not have that. What is happening in Sydney is perhaps more typical of scarcity pricing where lots of buyers are chasing too few properties, and there is still cash to go around with very cheap money to throw in for good measure.

When it will run out of puff is anyone's guess. Old price linkages where prices would only go up to the income level of average owner occupier of the suburb have been completely blown out of the water. In my suburb alone, 70% of owner-occupiers would not be able to afford to buy their own homes any longer. I would not be buying in Syd at this price levels, usually those who buy in last 3rd of price rise get burned, There is possibly no space left for prices to go another 30% in next year or two. If they do than we're entering serious territory,never seen before, and I would be running away from Syd screaming.

There will be flat lining soonish, interest rates are probably biggest influence. 58% of latest investor lending is interest only, and when that ponzi scheme comes down it will make some noise. In Syd if one has has not bought by now, it is too late to catch this wave, rather sit on the sideline and wait for puff to run out before buying.

To use example of a friend of mine, he has bought 4 properties, on combined income of 125k due to high equity in his original home. He is negative gearing to tune of 25k a year, happy to do it cause he is expecting capital gain. If rates go up to historical 7% he will have t come up with another 50k a year, so to say he'll be under water is understatement. His reply to me when I questioned this was to tell me he'll sell one or two units as soon as rates go up, to cash in. Only problem is he and another 20 000 people will be doing the same, so happy days for first time home buyers hopefully.

If anything really causes bubble to pop it will be black swan event, and few people are keeping eye on China's Shanghai stock market, up by 165% this year, amount of speculative trading is stupendous, marginal loan trading is up in hundreds of millions, if that market pops, and if history is anything to go by it will, check all Chinese investors selling Sydney and Mel homes to cover calls on margin loans back home.This is very real possibility.

Rant over...

Edited June 15, 2015 by benp

[Donovan83]

I'm not sure if what we have in Sydney can be qualified as a bubble. One of the necessary pre-condition for a bubble to form is oversupply of properties in the market, and Sydney certainly does not have that. What is happening in Sydney is perhaps more typical of scarcity pricing where lots of buyers are chasing too few properties, and there is still cash to go around with very cheap money to throw in for good measure.

The problem I foresee is that yes, there is undoubtedly demand, but the demand appears to be from investors who are treating fixed property as a financial instrument. They're not buying for returns in the form of rent (which have not increased in line with the increase in the price of the underlying asset), they're buying almost entirely on the hope that they can get future returns mainly from increases in the value of the property.

It's probably a good time to rent cheaper places and save the difference, rather than enter into a mortgage to buy an property at an overinflated price. Best case scenario is that prices stagnate once they peak, worst case is that there is in fact a huge bubble which could be financially devastating. Nobody knows.

Even in the states they thought prices could only ever go up... look what happened there. I think aussie banks are a lot more prudent with their lending, but they're probably not prudent enough when it comes to valuing the property being purchased.

[monsta]

@HansaPlease Its $130 per day in Sydney (but not in the CBD). At that rate, you get less than half back and only for 3 days a week.

@Donovan There isn't a bubble in Sydney. Its a bit like new York. Properties are worth what people are paying for them. There is no way the average Joe can afford to buy on Manhattan island.

The Aussie government has been clear they don't have an issue with the prices, only the amount of debt that people are getting into.

The real problem is they are not providing enough cheaper housing with decent transport options to get people to work. They know Sydney's population is booming. The politicians say it all the time. Yet, the councils go and build new suburbs with narrow little roads and no public transport.

Even when they redevelop areas to make them higher density, they just say "upgrading the main roads and trains falls under the state government. "

Then you have conspiracy theorists who say the politicians have never put the state government and local councils under pressure to work together because the pollies have huge property portfolios.

So, I hope the polls keep showing that people are upset about the lack of action on this issue! Maybe the politicians will pick their job over their house price

Edited June 15, 2015 by monsta

[HansaPlease]

@HansaPlease Its $130 per day in Sydney (but not in the CBD). At that rate, you get less than half back and only for 3 days a week

Once again, it's not $130 per day. Some centres may be charging that much, but the average is much lower.

There was an article last year showing the average daily childcare costs across the whole Sydney metro area by suburb. The lowest priced suburb was $69, the highest was $122, with an average of $85 per day. It couldn't have gone up that much in one year.

Even if you paid th highest rate, say $130 a day, and you get the rebate for three out of 5 days (most kids I know only go part time) then you're looking at $97 per day after the rebate. $75 per day for 3 days. Even better, if you go with the average, then it's $42.50 per day for three days after the rebate.

Just because the most expensive centres charge $130, does not mean that is your lot in the whole of Sydney.

It's like saying "cars cost $80,000 in Aus" when you've only been shopping for a Merc.

I agree, childcare is expensive but credit where it's due...

[Nev]

I tend not to believe anyone who has a vested interest in selling houses about the status of the market, so banks are not the best source for economic data on houses, there are also a ton of economists including the reserve bank of Australia that are really concerned about the market right now, this article pretty much sums up my thought pattern:

http://www.abc.net.au/news/2014-09-29/verrender-its-official-there-is-no-real-estate-bubble/5775112

A property bubble pops because the demand dries up or there is a shock of supply.

Right now the mining slowdown and manufacturing shutdowns are, and will, continue to have an effect right through Australia, if this leads to a lot of retrenchments the banks will be putting a lot of houses onto the market, that will drive prices down, this is probably the easy bubble deflation as investors can hold onto their properties and hope for a market increase, also they wont have the equity to buy more properties putting an immediate damper on the market, this will obviously depend on how bad the economy gets and the number of retrenchments).

The nasty one is if the interest rates go back up by a good few % (Which they will do based on historical averages), negative gearing is all about getting tax back due to running your investment properties at a loss, a lot of the people without decent amounts of saved up cash and with negative gearing will go bust pretty quickly and those properties will flood the market, that would pretty much nuke the property prices.

[Donovan83]

@Donovan There isn't a bubble in Sydney. Its a bit like new York. Properties are worth what people are paying for them. There is no way the average Joe can afford to buy on Manhattan island.

I'd like to believe this too. If there is a bubble, and it bursts, it'll be so severe I wouldn't be surprised if it takes one of the big 4 banks with it.

The thing is that every time there is a bubble, people all think "this time it's different"... meanwhile, there's really strong evidence of a bubble existing. It's always in hindsight that we wonder how we could possibly have missed the warning signs.

You need only compare the rent earned vs amount paid for the property to see that buying property in Sydney is a terrible idea if you're buying to invest with a view to earning a return - UNLESS you're speculating that the value of the property itself will continue to go up. Which, from what I can see, is exactly what's happening.

Meh. Probably the actual outcome will be halfway between booming forever and popping like a bubble. Maybe prices will just stagnate for 10 to 20 years while wages catch up. Nobody knows.

[ottg]

@Nev as that article is already 9 months old it should be much worse now?

I always ask myself where is the data to support any of those statements? To measure is to know! What is the market doing for Melbourne and Sydney over their long term medium house price. Anyone with spare time can do this: Use the data from 1995 till today. Perform least square fit on median house price over the past 20 years (long term). Calculate the annual average price growth rate and plot on same graph. When the deviation from the mean is below the long term trend line then the risk is lower and vice versa then the risk is higher. Till I haven't done that I wont know!

But remember the economic clock: When everyone is buying its time to get out/wait and when everyone is selling its time to buy.

So if everyone else is right then many opportunities will be coming up soon!

[monsta]

@HansaPlease. $130 is the going rate in my area. I am 45mins by bus from the CBD. Fees did go up by $10 this year. I hear some centres were charging $130 last year. But even if you look at a more average situation, childcare fees are enough to stop many families from buying.

@Nev ABC news had an expert on recently who said a more likely scenario is Sydney house prices may not go up much till 2018. He said the low end may not even go up at all till then.

That sounds more reasonable to me.

@Donovan83 The banks are not iddiots. They will keep tightening their lending criteria just enough to ensure they maximise their profit through this period without going under.

If you look at the bubble in RSA a few years ago.. There weren't even basic checks to see how much other credit someone had before they were granted a home loan. Even that awaful situation didn't take down any of the major banks.

[Nev]

@Donovan83 The banks are not idiots. They will keep tightening their lending criteria just enough to ensure they maximize their profit through this period without going under.

Im pretty sure that the USA thought exactly the same things right up until the banks all imploded?

Also they don't need to change anything, we not in a bubble right?

Basically what i'm trying to say is in agreement with Donovan, the banks never think it is a bubble until it is and it pops, people with vested interest never think it is a bubble until it pops, and i agree with ottg, there might be some real bargains sometime in the future, if you plan to buy now proceed with caution.

[Donovan83]

@Donovan83 The banks are not iddiots. They will keep tightening their lending criteria just enough to ensure they maximise their profit through this period without going under.

I never said they were idiots, and I also didn't say they didn't have lending criteria. I've been through the process of getting a home loan, I know how strict it is.

I think there is a lot of political and economic pressure to keep this bubble growing/inflated. The only way to do it is to keep giving loans (which is happening) for higher and higher amounts (which is happening), causing prices to become more and more over-inflated (which is the case already). Housing should generally grow with inflation, plus a small percent. Sydney has been growing at over 22% for the last few years. REA will tell you that this just means that housing was previously undervalued, which I doubt since rent hasn't increased by that much.

The banks, government, lenders, mortgage brokers, estate agents, politicians all have a huge vested interest in property always going up. People in this country seem to believe that property can only go up, which is false as there have been no less than 5 previous incidences of bubbles popping. Will there be another bubble? Definitely. Will it be in our lifetime? Who knows - but when I consider a slowing economy, the end of the mining boom, some shaky fundamentals, china's possible slowdown, etc etc, things don't look so great. The only thing in our favour is that the dollar is dropping so property is getting cheaper to buy for foreigners.

Like I said... I might be completely wrong. I'm going to play it safe for now though.

Im pretty sure that the USA thought exactly the same things right up until the banks all imploded?

Also they don't need to change anything, we not in a bubble right?

Basically what i'm trying to say is in agreement with Donovan, the banks never think it is a bubble until it is and it pops, people with vested interest never think it is a bubble until it pops, and i agree with ottg, there might be some real bargains sometime in the future, if you plan to buy now proceed with caution.

I guess our "just get a higher paying job" Mr Hockey might know something, seeing as he's quietly disposing of a property. If it can only go up and if it's so affordable, why sell?

Some interesting reading - http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

I've decided that I don't want to own a property until I have the cash to buy it almost entirely outright. And I am saying this as some that, until a week ago, owned a property in aus. I've sold and I am SO glad I have. I do want to own my own home, but not as an investment, it'll be my shelter. Until I have reached that stage I am going to rent cheap (renting is INSANELY cheap compared to buying, especially in Sydney/Melbourne) and invest the extra.

Edited June 17, 2015 by Donovan83

[ottg]

@Donovan until I have the cash to buy it almost entirely outright

It will be a constant struggle to catch up and to stay ahead. Then also you may miss out on all the wonderful tax incentives available due to gearing while on this journey. While everyone is bitching about the fairness or unfairness enjoy the journey.....

Except if you go the shares route making use of a margin loan. With a margin loan you can borrow between 50-70% of the value of the share. Of course the risk will be higher, leverage is less and I will need to understand the share market better.

But then..... why not doing both!! My 2c

[Donovan83]

These are good points, ottg... in normal circumstances, I'd agree. Most people my age have costs (kids being the biggest) and/or are paying rent alone. I'm fortunate to share so the cost of renting for me is very low. By just saving money into a savings account (I'm not only planning to do this... but just for simplicity sake), I'll be going forward a lot quicker without the headwind of interest costs on a mortgage or risk of a housing bubble popping to worry about. I don't think that there's a big risk of property prices continuing to grow at such a big rate that owning would provide a big enough upside to make up for feeling like I am going through life with a freight train strapped to my back... who knows, I will kick myself if I am wrong.

The tax incentives are deductions for losses. In order to get the deduction, you need to make a loss... I don't have any other income (other than salary) to deduct these tax incentives against. Besides, to get the incentive, I have to make the loss... so the benefit is really only my marginal tax rate x the loss.

I am a very risk averse person. Not so much risk of losing money I have, but putting myself in a position where I borrow large sums of money to buy an asset, which subsequently loses value and traps me. My decision to sell is a mixture of financial and emotional... in all honesty, having a mortgage has almost pushed me into a meltdown and it has cast an ugly shadow over what should have been an exciting time exploring a new city.

On top of that... after living here for a year, I now know I'm probably going to end up somewhere else which is warmer and sunnier than Melbourne in the medium term. No use having a risky asset tying me down here.

I'd never borrow money to buy shares - at least if you borrow against a property, if the value of the property drops to zero you've still got a place to live. Can't do that with stocks. I just don't have that level of appetite for risk.

It's probably swings and roundabouts. If I'd held on to this place, I'd have paid it off in about 9 more years. By selling, I'll save for about the same amount of time and be able to buy a place of similar value in future dollars, but without the stress of the mortgage, being tied down or taking on tenant risk. Works for me, might not work for everyone.

I'm surprised that this is how I feel. Before I bought a place, I thought it'd make me happy to own a spot. It drastically had the opposite effect. The last 11 months have been the most miserable of my time in Australia. This despite my mortgage payments being relatively small and despite me paying in extra each month. It's weird how I feel this way.

Edited June 17, 2015 by Donovan83

[ottg]

Donovan - its going to take to long to reply! Your last sentence says it - how I feel . Making a financial decision based on feeling is not so good!

[monsta]

Hey,

Let's sum up what we do suspect. Many of you guys think Sydney is in a bubble. We do know that even a small decrease in property prices or an increase in interest rates could be catastrophic. There are many theories about what may cause the bubble to pop, but nobosdy knows for sure.

As for the banks, we can all agree they are playing with fire.

We also know that all politicians watch approval ratings like hawks. So if the in affordability of houses may cause them to loose their job, they will be very concerned. The exact reason they are doing nothing is still not clear.

But, the overwhelming consensus here is do not buy a property in Sydney right now.

[Riekie]

Another "trick" some people are using for tax breaks and other financial benefits (massive loophole with questionable ethics) is for two families (of the same family - eg brothers, or cousins etc) to buy properties in opposing cities as to where they live and then live in the other family's house - if that makes sense.

Eg: Family A lives and works in Brisbane, Family B lives and works in Sydney

Family A buys a house in Sydney and rents it to Family B

Family B buys a house in Brisbane and rents it to Family A

So many things you could benefit from on your tax. You can even claim your costs for a trip to the other city to visit your investment property from tax, so a few times a year, they have a happy family gathering essentially paid for by the government. The things some people do (often unethically) to doge tax and collect benefits is mind-blowing. That includes government officials at the highest level as we've recently found out when a prominent minister would stay with his wife (house in her name) when he is in Canberra on official business while the government pays him $270 a day towards "rent" he is paying to his wife!!!

But, the overwhelming consensus here is do not buy a property in Sydney right now.

It is definitely a seller's market in Sydney at the moment! Our house value has increased with $200 000 just in the last 6 months and is worth more than double than what we've paid for it in 2007! If we sell our house now, we could settle our mortgage and still buy 4 properties cash about 2 hours drive outside Sydney.

[Nev]

@Donovan:

I really like this comment bud -

"I'd never borrow money to buy shares"

That one is getting saved for future use

Also like the article, but tounge in cheek but it makes its point with a sledgehammer

Edited June 18, 2015 by Nev

[Donovan83]

Riekie... Maybe you should sell then? I think the mentality is different if it's your home (rather than an investment property). I think the value of your home isn't that relevant if you are living in it (since the value being derived is a place to live, which isn't impacted by increases or decreases in the value of the place). I'd be looking to lock in those gains

You can even claim your costs for a trip to the other city to visit your investment property from tax, so a few times a year, they have a happy family gathering essentially paid for by the government.

That's not quite how it works. You get to claim the cost of the ticket against your taxable income. So if your ticket cost $100, the actual "cash" benefit would only be a tax saving of around $37 (assuming that's the tax rate applicable). Still better than nothing but the government doesn't pay for their family visits.

The other tax arrangement is quite a good idea... It just makes all interest on everyone's mortgage (and other costs) deductible. Smart, but I wonder how long it will be before that loophole is closed! Lol

@Nev: I was really surprised that people ever borrowed money to buy shares. It's like borrowing money to gamble in a way. I couldn't ever do that and still sleep at night. Of course there are a lucky few who make millions but I'm too nervous of the risk.

[ottg]

@Don It's like borrowing money to gamble in a way

The moment you see a share as a gamble then you have not done your homework. The typical parameters for quality shares:

http://www.saaustralia.org/index.php/topic/45032-long-term-share-market-investments-via-superfund-help-me/?p=409520

[Nev]

@ottg

I will borrow another one of Donnovan's comments and it is about appetite for risk, the idea of borrowing someone else's money, at a high interest rate, to put into a financial investment that will need to carry a fair amount of risk in order to make enough returns to justify the interest on the loan and still makes money, makes my hair stand up.

Sure people can make a lot of money that way, but you are taking a risk, and at the return rates you need to pay back what you owe and interest and make a profit.... you taking a stupid risk in my eyes....

What is the personal loan rate adjusted for additional bank fees at the moment, and you would want say at least 10% profit at the end of the day i would guess....

Yyour good comments on finding safer investments from that link wont work in this case as the returns on those safer investments wont be guaranteed to be high enough, and if you make less than the personal loans interest rate you are actually making a loss.

[Donovan83]

Interesting rent vs buy calculator --

http://www.nytimes.com/interactive/2015/06/17/upshot/100000002894612.app.html?smid=fb-nytimes&smtyp=cur&_r=0