Comments on: Property Buyers See Property as an Investment

By: scott

scott — Mon, 31 Aug 2009 01:24:27 +0000

If this is all true which i for 1 believe how to we get the property prices back to realistic affordable levels?
The view i have is i can afford to buy (have been holding out for a colapse) but do i really want to pay half a million dollars for a house and land that in recent years was only 280-340,000 with the only thing that has changed is more peoples perception of the current market.
How do we correct this??????

By: Will

Will — Sun, 30 Aug 2009 04:02:13 +0000

Dear Kris,
It doesnt matter what we think about property prices. So long as the system is protected it will continue.

Even if the average australian cannot afford an average home, we will still have overseas investors pushing up our prices. Investors from Hong Kong can buy australian properties at extremely low interest rates and receive positive cash flow from the rent alone.

If australian property were to tank, wouldn’t it have happened by now? It has in the UK and US. But not here. At the high end prices have already fallen substantially. From my perspective this was the extent of our housing crash.

I’m sorry but it doesn’t matter how many articles you write saying that property will fall, so long as those in power support the system, it will continue. I’m sure you’d love it if we had a property collapse and our banks went bankrupt as a result.

It takes about 10.4% p.a. growth for an asset to double every 7 years. Even if inflation is 3-4%, property only needs to do about 7% p.a. which I think our readers agree is reasonable. In many areas the return on buying a house is less than bank interest.

I eagerly await the day when our property prices crash and you can issue a big “I told you so”.

By: gurney

gurney — Sun, 30 Aug 2009 01:35:55 +0000

Australia has oodles of land, as far as the eye can see, so like you point out there is no fundamental reason for the huge differences in land prices accross suburbs, and this feeds nicely into your apples analogy.. our population is tiny, and our lands vast.. so how can there ever be a ‘shortage’ in Australian housing ?? Indeed the whole concept of house valuations in this country defies logic and is inherently flawed and i believe most owners are living in a total fantasy land as to the real values of their homes. How can a small 2-bedroom inner city ‘apartment’ be priced higher than a larger 4 br home with land, in the outer suburbs ? Stupidity breeds a herd mentality .. this is one of the only countries in the world where you can buy a lovely country acreage at cheaper than an inner city ‘penthouse’ ! Go figure – I for one am selling my city house for $1M and then putting that money into a large country acreage, enjoying it, and then cashing it later for when the demand for more apple trees eventuates !

By: Tony

Tony — Sat, 29 Aug 2009 14:34:05 +0000

Dear Kris,
I love your provocative comments on residential housing.
It would appear that you are correct that ,in historical terms at least, there is a housing bubble in australia.
Your explanation in terms of supply and demand (the apple story ) and your response to the location, location, location mantra was a little disingenuous.
Of course land and houses are more valuable in richmond when compared to dandenong – that arguement will never stand up to any kind of reasonable analysis and you know it. People have many different wants and needs when it comes to choosing a locality to live in – so the location….. mantra holds up when you look at schools,transport,beaches and any number of factors. Then there are numerous intangibles … ie your potential neighbours, snob factors ect ect.
Having lived and invested in Perth for the past 20 years I have seen incredible volatility in house prices. I am deeply troubled that the median house price is now about 6 times the average yearly salary when historically it is around 3.5 and I am concerned that a large correction is just around the corner.However when you look at rental yields which are certainly much better now than they were just 10 years ago and you factor in population growth of over 3% per annum and the potential for another resource led economic boom ( leading to increased salaries ) there would actually also be a valid arguement for an actual boom in house prices here.
With a property in the suburb of claremont, where we saw drops of around 20% last year primarily I believe because of overleverage and the stockmarket crash, there has been a solid rise in the past 4 months and a change in sentiment that could see a return to boom prices very quickly.
So I guess the thrust of what I am trying to say is that with property it really is all location location location.
ps I haven’t even got into household size yet. 30 years ago there were 4.5 people per household and we are now trending down towards 2.
All this doesn’t mean that some poor sods that are mortgaged to the hilt, bought in an outer suburb of sydney, about to lose their jobs and rushed their decision because of the 1st home buyers aren’t going to get burn’t,
It just means that the residential housing market is way too complex for a one size approach and anyone taking on a loan for 7 or 8 times their salary should tread very cautiously.
All the best,
Tony

By: Tonydd

Tonydd — Fri, 28 Aug 2009 02:46:19 +0000

Housing prices are corelated to the supply and demand of credit not the supply and demand of the accomodation, that housing provides.

Housing prices are corelated to the supply and demand of the price or cost credit in terms of interest rate.

Because lending to home buyers by financial institutions has been decoupled from the risk (of loss of bank capital) lending is not corelated to borrowers long term ability to pay.

Therefore my first policy initative would be to put all home mortgage borrowing in Australia on a ‘non recourse’ basis.

By: Greg

Greg — Thu, 27 Aug 2009 04:43:50 +0000

Hi Kris

Thank you for your well-considered analysis of Australia’s property market.

Anyone who believes supply is THE problem only has to check for their favourite suburb for available rentals on realestate.com.au…inner city or outer suburb, fashionable or otherwise makes no difference – there are hundreds available in each of them.

The problem therefore isn’t supply, it’s supply at a price that people are able to afford. And that’s not surprising – a landlord who has paid over the odds for their property (because “supply is short and rentals are in such demand”) will likely set their rent above what the market can pay (because that’s what they need to make their “investment” work).

And when the market can’t pay the rent, they sit empty…

By: BB

BB — Thu, 27 Aug 2009 03:49:17 +0000

You can’t get comments or perspectives such as these published or broadcast in the mainstream media. But thats not surprising when you consider the amount of advertising revenue the property sector puts up. Why would you bite the hand that feeds you? Property, particularly housing has evolved into the holy grail and focus of nearly every Australian. It simply cannot be left to scrutiny of any sort which may cause the slightest trepidation amongst potential buyers which in turn will translate into a price decrease. This despite the evidence of the collapse in unsustainable lending practices and overvalued property prices being the main trigger for the GFC. Our stupid government at federal and state level are forcibly driving people toward it (obviously with the strong influence from the self interested housing, banking and real estate lobby groups) with any number of carrots – and praying that a big stick called interest rates doesn’t revisit as it did in the late eighties. Back then the average house loan was around $100K and the average house cost about $150K. Imagine having borrowed the average loan now of $400K when interest rates start ticking toward 8%? What happens if – as is highly likely – Australia’s status as a pissant economy requires that they go to 12% to attract money? And God help all you first home buyers if it gets back to 19% which is where it was in 1989/90. You will need to grind out close to $80 grand a year net just to pay your interest – not to pay off your loan. You better have a bloody good job and secure income. Don’t think it could possibly happen ever again? Ha ha! Have fun speculating in property over the next decade. You just enlisted in the biggest Ponzi scheme going around.

By: Sam

Sam — Thu, 27 Aug 2009 03:33:21 +0000

Though I may not necessarily totally agree with all your points however most of your comments in relation to the decision process of a typical buyer are quite valid and in line with value investing principles.

As always we do appreciate commentators from both extreme sides of the spectrum- adds to the vitality of a forum and essential in the furthering of knowledge. Yes for all published data a scrutiny in relation to conflicts of interest should be essential- but also typically overlooked.

There’s no need to feel perturbed from contributing to contentious topics provided that it is done responsibly- RP Data can be somewhat abrasive in style and these things come with the territory amongst commentators. RP tend to impress people based on it’s resources, and complexity of methods- neither of which in its own right necessarily validate their conclusions drawn, however they do provide a valuable service to the public in disseminating a lot of interesting data and graphs. A lot of their comments were highly intelligent though can also be misleading at times so one would need to interprete the data in ways one would see fit to allow for some of the bias. Having said that on very minor occassions they did manage to convince me to alter my own views somewhat.

By: Greg Reid

Greg Reid — Thu, 27 Aug 2009 02:52:52 +0000

Kris,
I receive your e-mail and read it and discard it in most part. I think you are biased against property but the argument you ran with for this article warrants consideration. I do agree property investment is about finance, it is about leverage and using other peoples money to invest in capital growth assets. The reason I use property is because the banks will lend at higher ratios than they will against shares. It is the lenders who believe in asset class to lend against it. You are buying a loan, I agree.

You need to do it safely and securely and build in safety nets. Done well, you can build a property portfolio over time but we are talking 10 years and longer. My strategy for clients is to look at adding 1 property every 2 years or so to your portfolio.

The other benefit of the property market is that you will not suddenly be holding property with no value as you can do with shares. There is no intrinsic value in a share in itself, so having shares in a company like a Lehman Brothers (or many other listed companies) who overnight became worthless, the share itself is worthless. This does not happen with residential property, people still need to have a roof over their heads.

The volatility of the residential property market (as opposed to property trusts) is far lower than the share market.

Most of the property owners in Australia are home owners with a considerable percentage having outright ownership. They do not consider their property to be a tradeable asset. One of the reasons that property should not crash 40% or more is that the supply of houses on the market will not suddenly increase greater than demand. Many people have no reason to sell. Property investors only make up a small part of the overall market. You still need to be smart in where you are buying investment properties and what type just as you do with shares.

I read the property spruikers also and in most part discard what many claim, however a well structured strategy over time can build a successful property portfolio. It is a finance strategy.

By: dave

dave — Wed, 26 Aug 2009 10:53:22 +0000

I bet etch is a realo or a happy stick.