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Alarm bells sound over Australian property prices; Paying the interest on a mortgage costs nearly double paying the rent
Topic Started: 27 Aug 2015, 11:38 AM (2,389 Views)
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Alarm bells sound over Australian property prices

25 Aug 2015, Andrew Thomas

A fortnight ago, my family and I moved house. It is always traumatic; and it’s amazing how much two young girls can add to the load.

As well as furniture, we had about 60 boxes to shift. Packing and unpacking took three days.

We’re renting: AUD$3,500 (US $2,500) a month for a three-bedroom house in south Sydney.

We did think about buying but attending a few auctions changed that. A similar house to ours, in the same area sold in front of us for AUD$1.7m (US $1.25m). Add tax and fees to the purchase price, and paying the interest on a mortgage – even at a record low rate of 4.18% being offered by one bank – would cost more than AUD$6,000 (US $4,300) a month. So, paying the interest on a mortgage on a house like ours costs nearly double paying the rent on one.

After Monday’s dramatic fall, most eyes were on what Australia’s ASX stock market would do when it reopened on Tuesday.

Stock markets are often a proxy for a country’s economic well-being. On Monday Australia’s suffered a hit. Would it recover?

But another proxy is house prices. Over the last few years, they have soared.

Is Australia's mining boom losing steam?

But are such high house prices justified in Australia? And what would the implications be if they are not?

First, the implications of house price falls.

At AUD $6 trillion, the value of Australia’s housing stock is huge. It is about three times national GDP, three times, too, the total value of shares in companies listed on the ASX.

With house prices at all-time highs – averaging AUD $1m in Sydney – it’s a tough market for newcomers like me to get into.

But for those who bought some time ago, price rises mean big gains, on paper, in wealth. Some remortgage their homes, effectively raising money to spend in the rest of the economy.

But even for those who don’t, the paper gains in their homes' value translates into confidence to spend freely elsewhere. If that confidence disappeared because house prices were to fall, the impact on the rest of the economy could be big.

As the respected economist Stephen Koukoulas told Al Jazeera this week: “One of the real risks for the Australian economy in the next year or two is if house prices start to fall or weaken. We saw - during the crises when property prices fell in the US, the UK, Spain and Ireland and other economies - how damaging that was to the banking sectors and how damaging that was to the whole economy. If the tightening of rules on lending - and just the sheer affordability problems that many people are facing (caused house price falls) then the risk of recession would grow.”

In some places, prices are already falling. I was in Singleton last week – a town hit hard by the downturn in mining. There, house prices have dropped by close to half from peak. The main street is full of empty shops and glum faces.

But are prices likely to fall elsewhere too – in Sydney or Melbourne perhaps?

A little-noticed report from the property website Domain was published late on Monday with the latest data on auctions in Sydney. Auctions are how most Sydney residential properties are sold.

Successful sales at auction – sellers reaching their minimum, reserve, price – were down last weekend as “the market continues to be flooded by unprecedented numbers of homes for sale” it said. “Sellers are rushing to take advantage of a market that is still in their favour – for now.”
Terrace houses in Balmain, Sydney. Possibly more than half of Sydney's residential property is being bought by investors [Getty Images]

Could Sydney’s frothy market be on the turn?

A top official at Australia’s central bank, the Reserve Bank, said in June that the Sydney market was "unequivocally" in a bubble.

A few economists have predicted a "bloodbath" when that bubble bursts. But just as many economists have poured cold water on such reports saying the only way for house prices is "up and up".

A few facts though should sound alarm bells for those thinking of jumping in. Firstly, around half or possibly more of Sydney’s residential property is being sold not to people who want to live in it, but to property investors. Secondly, those property investors know they won’t be able to cover their borrowing costs with rental income – even at historically low interest rates.

Instead, they are counting on capital growth long term to offset the rental shortfall in the short term. The expectation of future rises justifies the purchase price. To me, that seems as close to a definition of a "housing bubble" as you’re likely to get.

One report last month claimed to show Australian housing was undervalued by 30 percent, but it included purchasers’ ‘expected capital gains in the calculation to work out fair current values.

That’s like asking someone buying a share not only what dividends they expect, but also what they expect the share itself to be worth in five years - and then including the guess of the future capital gain in share’s "real" - current – value. It’s circular. To me, it seems meaningless.

I would dearly love the housing market to cool – and for prices to fall. But be careful what you wish for.

Australia hasn’t had a recession in about 25 years – not since the recession Australia "had to have" in the early 1990s.

Most of the current talk is about the mining downturn or a potential stock market collapse. But if there is to be another recession, it is likely to be falling house prices that causes it.

Read more: http://www.aljazeera.com/blogs/asia/2015/08/alarm-bells-sound-australian-property-prices-150825213837660.html
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Chris
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It's all good and well to point out the bleeding obvious, this is hardly journalism. Anyone with a shred of intelligence can tell you that the housing market is extremely leveraged and has the ability to destroy our economy if it goes tits up. What no one can tell you is what would be a catalyst for this to occur.

People bang on (me included) about unemployment or investors cooking the house etc but these are hypothetical situations. Unemployment is not an issue, it hasn't been for decades, in fact quite the opposite. Investors are very active but arrears and foreclosures are extremely low even for this highly leveraged group.

I still believe that housing has is in an extremely dangerous position economically but I will also be the first to concede that there are more things working to help house prices rise than there are working against them. RBA, government, FI with large sums of dirty money, banks etc are all working hand in hand to make sure property remains high, these are powerful forces to have in your corner. They have all made it very clear that they will prop up property until the ability to do so is removed e.g. recession. They are essentially saying that they are happy to cook the mother of all geese if worse comes to worse, until then buy buy buy!!!!

On the bright side all their speculative debt will become public debt if it goes to shit. Something to look forward to really 😀

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GloomBoomDoom
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I often see comments about how it's cheaper to buy than rent but I don't think I've ever seen an actual case where that is true.
If you simply look at how much you'd pay in rent for a particular place and how much mortgage payments would be for similar, the cost is night and day.
Happy to be proven wrong.
MSE
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Hankook
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I purchase my rental 7 years ago, rent has only gone up. Started at $300 a week, now it's $440. The interest on the house I live in when I first got the loan was roughly $2,000 per month. It is now around $400 a month. With purchasing a home at least you can see a finish line. Never ending race while renting
GloomBoomDoom
27 Aug 2015, 12:41 PM
I often see comments about how it's cheaper to buy than rent but I don't think I've ever seen an actual case where that is true.
If you simply look at how much you'd pay in rent for a particular place and how much mortgage payments would be for similar, the cost is night and day.
Happy to be proven wrong.
But after a certain amount of years after you have paid off some principle you could refinance and it would be cheaper. Also rents have gone up in Australia's 2 biggest city's and capital gains have been great. It might be cheaper to start renting but in the long run no chance. Where r u going to live once you retire? Unless you have been investing a good $100 a week for your whole working life, life would be tougher
Edited by Hankook, 27 Aug 2015, 01:25 PM.
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Happy
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I was living in my own home when I lived in a regional area as it was not that much more expensive than renting however I have moved to Melbourne and the difference is ridiculous. My rent is $1750 each month but it would cost me more than $7000 each month in repayments if I was to buy it. I have decided to rent as I only need to reside here for the next five years. I save around $3000 a month so will have a decent deposit to go towards a home when I head back to NSW.
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hoofarted
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Everyone compares buying and renting over your whole life. The fact is that your life changes and your needs change. Renting is access to a service that is flexible and able to change as you need it, most of the time at a moments notice. That has a value too. Also, who's to say that just because someone rents, they don't own too? Best of both worlds in my opinion.
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GloomBoomDoom
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Hankook
27 Aug 2015, 01:19 PM
I purchase my rental 7 years ago, rent has only gone up. Started at $300 a week, now it's $440. The interest on the house I live in when I first got the loan was roughly $2,000 per month. It is now around $400 a month. With purchasing a home at least you can see a finish line. Never ending race while renting

But after a certain amount of years after you have paid off some principle you could refinance and it would be cheaper. Also rents have gone up in Australia's 2 biggest city's and capital gains have been great. It might be cheaper to start renting but in the long run no chance. Where r u going to live once you retire? Unless you have been investing a good $100 a week for your whole working life, life would be tougher
I should have added that the comparison needs to be made with no shadow like trickery.
Just example of how much rent vs how much mortgage payment. If the mortgage payment doesn't in include principal then I still consider it renting.

MSE
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Shadow
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GloomBoomDoom
27 Aug 2015, 12:41 PM
I often see comments about how it's cheaper to buy than rent but I don't think I've ever seen an actual case where that is true
If you only compare first year costs, then it has always been cheaper to rent. Rental yields have always been lower than mortgage rates...

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Renting anything is cheaper if you only need it for a short time.

But most people require accommodation for more than one year. 70 years is typical.

So you really need to work out the cost of each option over 70 years.
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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Will
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My Hardie asbestolux box that I bought in kenmore, west of Brisbane in 2011 for 380k with an 80 percent loan is costing me about about 280 to 300 dollars a week in interest.

I don't think there is much to rent in kenmore for that sort of money.

There are other property markets in Australia, other then premium Sydney and Melbourne locations. Lots more actually!!

I've even seen a poster by the name of frank castle saying this, so it can't just be in my head.

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van
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Firstly, around half or possibly more of Sydney’s residential property is being sold not to people who want to live in it, but to property investors. Secondly, those property investors know they won’t be able to cover their borrowing costs with rental income – even at historically low interest rates.


The world of NG, tax payer supported unaffordable housing.
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