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"We had to get a home" - desperate homebuyers camp out for three days to buy in Sydney; The only way to secure a property as Sydney house prices continue their inexorable rise
Topic Started: 4 Sep 2014, 08:26 AM (9,949 Views)
John Frum
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A Lurker
7 Sep 2014, 08:50 AM

I pay less than a full days pay for the interest on a 4 bedroom family home in a nice part of Sydney that I bought in 2007.
Great, I'm happy for you!

How about a general breakdown of your speedy fortune building for us dummies - you know, the principal you paid, your monthly payments, any windfalls etc.. just so we can see if it all stacks up, and also to see if your strategy is a useful one to employ in current conditions.
Shadow
7 Sep 2014, 09:37 AM

You are pinning your hopes on an unprecedented event.
Japan, Spain, Ireland.

:z:
Shadow
7 Sep 2014, 09:37 AM

But even if you do get the deflation you hope for, the person with a fully paid off home still pays less than you will be paying in rent.
That's called a gamble too.

Tokyo
:z:
Edited by John Frum, 7 Sep 2014, 09:46 AM.
"It were not best that we should all think alike; it is difference of opinion that makes horse races." - Mark Twain on why he avoids discussing house prices over at MacroBusiness.
"Buy land, they're not making any more of it." - Georgist Land Tax proponent Mark Twain laughing in his grave at humourless idiots like skamy that continually use this quip to justify housing bubbles.
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A Lurker
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John Frum
7 Sep 2014, 09:39 AM
Great, I'm happy for you!

How about a general breakdown of your speedy fortune building for us dummies - you know, the principal you paid, your monthly payments, any windfalls etc.. just so we can see if it all stacks up, and also to see if your strategy is a useful one to employ in current conditions.

Japan, Spain, Ireland.

:z:

That's called a gamble too.

Tokyo
:z:
Nothing special about it. It's the same calculation for all situations. The first few years the payments are high (compared to renting) and then inflation works it's magic so that you are paying yesterday's prices with today's dollars (unlike rent which you will pay today's prices with today's dollars). If you don't believe in inflation though there will be no convincing you.

PS it works especially well for people like you and me where the accommodation cost is a relatively small percentage of pay as you can put the surplus into paying down principal and accelerate interest cost reductions.

Also Spain and Ireland had problems unique from Australia: overbuilding and not own currency issuer. Japan has a problem unique from Australia: declining population (every year they need less houses). When Australia starts to have a declining population or gives away control of its currency I'll agree with you (although by then I'll be living in a paid off house).
Edited by A Lurker, 7 Sep 2014, 09:57 AM.
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John Frum
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Shadow
7 Sep 2014, 09:37 AM

The RBA has a mandate to ensure inflation. They will do what is necessary to achieve that goal.
You have made another huge gamble on a central bank's ability to stabilise an economy with a simple lever and a few well timed words. (Note: i have no position or interest in gold)
"It were not best that we should all think alike; it is difference of opinion that makes horse races." - Mark Twain on why he avoids discussing house prices over at MacroBusiness.
"Buy land, they're not making any more of it." - Georgist Land Tax proponent Mark Twain laughing in his grave at humourless idiots like skamy that continually use this quip to justify housing bubbles.
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Shadow
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John Frum
7 Sep 2014, 09:39 AM
Japan, Spain, Ireland
Let's say it's unprecedented for a country such as Australia with a growing population, no property bubble, and no housing glut.

Japan has a declining population. Every year there are more and more homes per person, so prices will not rise because supply always exceeds demand.

Spain and Ireland had huge construction booms leading to massive over-supply of property - vast empty ghost estates. They also had unprecedented price booms. Prices quadrupled in a decade, which is double the pace prices have ever increased in Australia. But even after the crash in Ireland, prices are moving up again. Dublin is up 25% in the past year.

And as I've mentioned before, Ireland, USA, Spain, Greece represent about 2% of the countries in the world. The vast majority of countries, including Australia, did not have a bubble and therefore did not have a crash.

The odds are against you. You are taking a huge gamble if you think Australia's population will decline soon, or you believe Australia has vast empty ghost estates hidden away somewhere, or that house prices here have quadrupled in the past decade. The conditions don't exist here for Australia to experience what happened in Ireland or Japan.
Edited by Shadow, 7 Sep 2014, 10:06 AM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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John Frum
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A Lurker
7 Sep 2014, 09:53 AM
Nothing special about it. It's the same calculation for all situations. The first few years the payments are high (compared to renting) and then inflation works it's magic so that you are paying yesterday's prices with today's dollars (unlike rent which you will pay today's prices with today's dollars). If you don't believe in inflation though there will be no convincing you.

PS it works especially well for people like you and me where the accommodation cost is a relatively small percentage of pay as you can put the surplus into paying down principal and accelerate interest cost reductions.

Also Spain and Ireland had problems unique from Australia: overbuilding and not own currency issuer. Japan has a problem unique from Australia: declining population (every year they need less houses). When Australia starts to have a declining population or gives away control of its currency I'll agree with you (although by then I'll be living in a paid off house).
Thanks, but as previously discussed I'm aware that inflation erodes the cost of capital.

I asked for some figures please.


Also they're not different. They invested too much in housing and their economy got screwed. They all collapse differently but the underlying drive to get there is the same - people's belief that property is the perennial path to wealth.
Edited by John Frum, 7 Sep 2014, 10:08 AM.
"It were not best that we should all think alike; it is difference of opinion that makes horse races." - Mark Twain on why he avoids discussing house prices over at MacroBusiness.
"Buy land, they're not making any more of it." - Georgist Land Tax proponent Mark Twain laughing in his grave at humourless idiots like skamy that continually use this quip to justify housing bubbles.
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A Lurker
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John Frum
7 Sep 2014, 10:04 AM
Thanks, but as previously discussed I'm aware that inflation erodes the cost of capital.

I asked for some figures please.


Also they're not different. They invested too much in housing and their economy got screwed. They all collapse differently but the underlying drive to get there is the same - people's belief that property is the perennial path to wealth.
About to take the kids to sports. I'll come back to this later.
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John Frum
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Shadow
7 Sep 2014, 10:02 AM
Let's say it's unprecedented for a country such as Australia with a growing population, no property bubble, and no housing glut.

Japan has a declining population. Every year there are more and more homes per person, so prices will not rise because supply always exceeds demand.

Spain and Ireland had huge construction booms leading to massive over-supply of property - vast empty ghost estates. They also had unprecedented price booms. Prices quadrupled in a decade, which is double the pace prices have ever increased in Australia. But even after the crash in Ireland, prices are moving up again. Dublin is up 25% in the past year.

And as I've mentioned before, Ireland, USA, Spain, Greece represent about 2% of the countries in the world. The vast majority of countries, including Australia, did not have a bubble and therefore did not have a crash.

The odds are against you. You are taking a huge gamble if you think Australia's population will decline soon, or you believe Australia has vast empty ghost estates hidden away somewhere, or that house prices here have quadrupled in the past decade. The conditions don't exist here for Australia to experience what happened in Ireland or Japan.
Mining boom. Terms of trade. What part of the dutch disease narrative don't you get?
"It were not best that we should all think alike; it is difference of opinion that makes horse races." - Mark Twain on why he avoids discussing house prices over at MacroBusiness.
"Buy land, they're not making any more of it." - Georgist Land Tax proponent Mark Twain laughing in his grave at humourless idiots like skamy that continually use this quip to justify housing bubbles.
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Sydneyite
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John Frum
7 Sep 2014, 08:36 AM
I pay less than a full days pay of my salary for a four bedroom family home in a nice area of sydney half an hours commute from the CBD. I can save a day and a half's full pay a week. A similar place bought with 80% leverage would double my weekly housing costs, most of which will initially be 'dead money' paid to the bank as interest.

Tell me skamy, if prices stagnate for a decade and interest rates start to rise, which situation will be best for us, assuming a purely financial play (i.e I'm willing to forgo the freedom to home renovate for 10 years) ?
I can beat that! I pay about 5% of one full days pay per week to cover the ownership costs (rates, insurance etc) for a fully renovated 4 bedroom full brick family period home, with all the luxury mod cons, located in a prestige suburb in Sydney's mid north shore. My wife only works part-time (1-2 days/week), and yet we manage to save/invest about 2 to 2.5 full days pay every week as well.

As far as your position goes, you should do an NPV (net present value) of cash-flow analysis on your situation. You may be surprised at the result. Renting long term is nearly always financially the losing strategy compared to owning - especially when you could have bought 2-3 years ago before Sydney prices went up 30%+, but chose not too because you thought renting was cheaper. You will have to save a *lot* of rent to make up for having to pay that much extra when/if you eventually buy.

Quote:
 
My gambit is that current conditions won't continue - higher IRs, or monetary-policy resilient deflation as a result of chronically low IR, or a sharp decline in asset values are all likely the next few years in my predictions.
PS re this quote, I'll crunch some NPV numbers for you and update this post in a few minutes, but of course given that you have such an extreme view of likely future conditions, it's probably an irrelevant analysis. None-the-less it is certainly still possible to show that under current and typical historical conditions (re interest rates, inflation, price appreciation etc), owning is always better.

OK here's some NPV results based on buying a $1M house @ 80% LVR. Key assumptions are: 3% inflation / discount rate, 3% house price appreciation, 5.08% mortgage rate, 3% net rental costs/yield, increasing at the rate of inflation, 30% marginal tax rate, 4% stamp duty cost, 2% selling costs. As you currently pay rent with a days pay and save another 1.5 days pay, I've built in the assumption that those extra savings go into the mortgage (or an offset account against the mortgage).

Results are as follows (these figures are the NPV of cashflows for owning, which is the same as the amount in NPV that you are "ahead" vs having rented over the same period):

Total 5 yrs NPV: $29,425
Total 10 yrs NPV: $109,320
Total 30 yrs NPV: $507,635
Total 40 yrs NPV: $740,419
Total 60 yrs NPV: $1,247,051

Also out of interest, the first year rental costs is $30k ($576/week) vs the first year mortgage interest cost of $40.6k ($780/week). And it takes about 3-4 years before the NPV cash-flow sum becomes positive - ie renting is "cheaper" than owning for the first 3 years, but longer than that and owning starts to move ahead, then well ahead.

EDIT: Just to be fair, given your uber bearish outlook - if I make the property value decrease by say 25% over the first 5 years, but leave all other inputs the same, then the 5 year NPV of cash-flows result is negative $324k. Ie you benefit by that much by renting instead over that period in this scenario. Of course had you bought 2-3 years ago before the latest price rises, you would be $250k+ in NPV terms ahead already, such that even if your uber-bearish outlook were then to eventuate, in another 5 years time after that you only be slightly behind, and would soon get ahead again.
Edited by Sydneyite, 7 Sep 2014, 02:57 PM.
For Aussie property bears, "denial", is not just a long river in North Africa.....
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Shadow
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John Frum
7 Sep 2014, 10:11 AM
Mining boom. Terms of trade. What part of the dutch disease narrative don't you get?
LOL, you've been reading too much Macrobusiness. I know all about their 'narrative'.

You do realise they've been consistently wrong about house prices, right?

Believe it or not, Australia existed before the mining boom and house prices and rents still rose.

Australia's service sector represents 70% of GDP while the mining sector is only 10% of GDP.

And in terms of employment, mining is even lower...

Posted Image

And it's not like mining has even ended. We still mine, even outside mining booms.

Like I said... you are taking an enormous gamble.
Edited by Shadow, 7 Sep 2014, 10:20 AM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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John Frum
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Shadow
7 Sep 2014, 10:18 AM


Like I said... you are taking an enormous gamble.
Yes I'm aware MB, like lots of other high profile economists, called the top wrong. I'm aware of the 'stopped clock' argument for predicting crashes. I'm also aware that mining represents a sliver of our national employment. And I'm aware that i missed a trick not buying 10 years ago.

But I'm also aware of how the spoils of a capex boom trickle down to others not involved in mining, through increased government tax receipts, a desire for foreigners to partake in the spoils of the boom to by pushing their money over here, and how this gives us fantastic terms of trade by making our imports cheaper.

I'm also working in the financial industry and I'm aware of the enormous profits they make from the continued momentum in rising house prices, and the debt levels people are talking on to bid up housing with the assumption that it's business as usual. I'm aware from discussions with others in the industry how no other part of the business provides them with profits as big as this currently.

Plus I hear the bbq anecdotes - the 5 years old who's putting her pennies in a jar so she can save for a house one day. The bogans rag to riches stories. Basically the blinkered belief that housing represents the source of wealth rather than the spoils of it.

That's why I'm taking this gamble.
"It were not best that we should all think alike; it is difference of opinion that makes horse races." - Mark Twain on why he avoids discussing house prices over at MacroBusiness.
"Buy land, they're not making any more of it." - Georgist Land Tax proponent Mark Twain laughing in his grave at humourless idiots like skamy that continually use this quip to justify housing bubbles.
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