We have seen an incredible run up in house prices that outpaced wage growth since the mid nineties due to many factors that have been endlessly debated here and elsewhere, but it won't continue because it can't continue. Exponential growth in house prices has now well and truly halted, and we are seeing a correction.
Agree with all of what Peter says.
I don't see how how prices can stray too far from a level at which an average couple can afford the repayments (about 30% of disposable at the start) on a 30-year mortgage on an average house.
Note that this little equation has been affected by lots of things, including: * massive drop in interest rates since the 1980s. * Increase in availability of credit. * increase in workforce participation rates (hence rise in average household disposable) * disposable income rising faster than CPI * Lowering of expected trend inflation rate. (if this goes up, house prices go up.)
Also there has been some overshoot.
House prices have come very close to correcting back to the line already, but a rise in full-cycle expected interest rates will push the line down still further. I have difficulty envisaging a situation where the line will rise other than through a rise in ful-cycle expected trend inflation rate.
Also there is a possibility of over-correction which would give people a good entry point.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
I'm quite tired of pointless discussions with sockpuppets but I will respond to this one:
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This is comletely fallaceous. For a start, there's no law saying you have to sell after 5, 8 or even 10 years. (Although I'd say that if you don't intend to stay in the same place for 5 years the incentive to buy becomes much weaker.
There is nothing "fallacious" in my response. I just stated the obvious truth that changeovers make significant difference between buying and renting in Australia. This is fact that is easy to calculate.
Sure there is no law forcing people sell and buy every 5, 8 or 10 years but we also know that this happening around us. Many people buy small and/or non-adequate property with the idea of upgrade and that makes them financially worse off that people who wait and than buy the adequate.
So, changeovers make significant difference and with changeover frequency recorded in past two decades it makes crucial difference. Many people are worse off financially even after golden property period of price boom just because they upgraded too often.
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For another, changeover costs are not that high.
These costs are one of the highest in the developed world. Maybe $30k is not much for you but an average Australian has to work more than half a year for that money.
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The point about changeover is that you take your equity from one house to another. The changeover costs are essentially stamp duty plus selling commission. There are other costs but they are noise in comparison. For an owner-occupier in Qld, unless you ere in the 1M+ category, it's about 2.5% of the value of the old place plus 3% of the value of the new place.
Everybody here knows how much that cost is, the issue is whether that is high or not. 5.5% of the average house in QLD is equal 6+ month average wage. That is high by normal people standards and world standards as well. It is also extremely high for any kind of investment costs.
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Over any 30-year period you care to name, that is less than 2 years worth of capital appreciation
Here we go ....
The old story of price doubling every 7 or 10 years ha ha ha
5.5% could be less that capital appreciation over the 10 years. That is very likely to be case in next 10 years. In fact for people who bought 2 years ago in QLD it will take quite a few years of significant growth to reach that level (they are currently 12% down if changeover cost is included).
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You, of course, may believe that the world has changed completely, but that is a directional bet (and hence a risk) that you are choosing to take. You cannot live without risk. Every time an opportunity presents itself, you take a risk regardless of whether you take it or leave it. Sooner or later you need to back yourself if you want to move forward. But in the end it is a decision we each need to take for ourselves.
Life is full of risk and one of the most important life skills is ability to manage the risk. Only fools think every risk is good risk worth trying. Property market risk is not constant. In 1999 that risk was very low, in 2012 risk is huge. The fact that housing was good bet in one point of time does NOT implies that is good bet now. Quite the opposite. The price jump over the 2000s just made risk today higher.
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BTW: If your particular decision for now is to save like stink, invest somewhere else and not buy into your own place until you get a better entry point, or even that you will never buy a house and instead just buy gold, and that decision is based on your view of what the market is doing, I cannot fault you.
I never said that people should not make their own decision. I just corrected your lies that changeovers do not make any difference about financial results of property market participation.
Point of my post was to show people that you lied - that is all.
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In the long term, I think the numbers are stacked against you, but you still have a good chance of winning in the short term and some chance of winning in the long term.
First of all there is no my position here. I didn't say buy or not. I have no intentions to buy or sell any time soon or later. I just offered quite flexible tool to the people and pointed out lies that you posted - that's all.
BTW. There is no long term benefit issue here. Decision to buy in 3 years if/when price falls 10%, 20% or 30% will always be financially better decision that the decision to buy now. Even if price jumps 1000000% in 10 or 30 years after that.
Question is not whether is better to buy now or not to buy (that is lifestyle and emotional decision not financial). The question is whether is better to buy now (when real prices are close to record high) or in 3 or 5 years when real price is likely to be significantly lower.
Even the most optimistic person out there doesn't think prices will go up in real terms over the next 3 or 5 years - so there is very little chance of "losing" by not buying now. On the other hand there is high probability that prices will fall a little in nominal and quite a bit in real terms over the same period. There is also quite high change of large crash - so there is a lot to gain by not buying now.
It's up to people to manage these risks, but answer is quite obvious.
I'm quite tired of pointless discussions with sockpuppets but I will respond to this one:
Nobody is forcing you to post.
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I never said that people should not make their own decision. I just corrected your lies that changeovers do not make any difference about financial results of property market participation.
You posted that the changeover negates 5 years of capital appreciation, and then you were debunked. Then you changed the topic again to how many months of average wages the changeover costs. Note also that I also said that at a 5-year changeover frequency the whole own-your-own home thing becomes marginal, so I don't know where you get the idea that I was saying changeover costs are irrelevant.
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Over any 30-year period you care to name, that is less than 2 years worth of capital appreciation
Here we go ....
The old story of price doubling every 7 or 10 years ha ha ha
Since you seem to be math-challenged, 5.5% over 2 years is 2.7% per annum, which equates approximately to a doubling every 25-26 years. Now go find me a 30-year period in which nominal property prices have not doubled.
You posted that the changeover negates 5 years of capital appreciation, and then you were debunked. Then you changed the topic again to how many months of average wages the changeover costs. Note also that I also said that at a 5-year changeover frequency the whole own-your-own home thing becomes marginal, so I don't know where you get the idea that I was saying changeover costs are irrelevant.
at the moment change-over negates growth of infinite number of years (prices are falling)
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Since you seem to be math-challenged, 5.5% over 2 years is 2.7% per annum, which equates approximately to a doubling every 25-26 years. Now go find me a 30-year period in which nominal property prices have not doubled.
Question is not whether is better to buy now or not to buy (that is lifestyle and emotional decision not financial). The question is whether is better to buy now (when real prices are close to record high) or in 3 or 5 years when real price is likely to be significantly lower.
Even the most optimistic person out there doesn't think prices will go up in real terms over the next 3 or 5 years - so there is very little chance of "losing" by not buying now. On the other hand there is high probability that prices will fall a little in nominal and quite a bit in real terms over the same period. There is also quite high change of large crash - so there is a lot to gain by not buying now.
It's up to people to manage these risks, but answer is quite obvious.
You have made some good points here
The central question for first home buyers and buyers in 2012 is RISK!
Many first home buyers and buyers are conducting RISK BENEFIT ANALYSIS.
Buyers are looking at low housing affordability, Australia's high interest rates, inflation rates, low wages growth and falling property prices. This is all underpinned by the highest priced property in the world.
Of course the second GFC is looming driven by the Eurozone and will increase risk in the credit markets and destabilise the share market, which will reduce overall wealth for Aussie households. Without stating the obvious risk is increasing.
You made a clear and simple key point.
In the 1990's the risk for buying residential property was low. In 2012 the risk for buying residential property is high.
How many Australian buyers will jump in at a time of high risk??
In the 1990's the risk for buying residential property was low. In 2012 the risk for buying residential property is high.
How many Australian buyers will jump in at a time of high risk??
There is perceived risk and risk in hindsight.
In the early 1990s, unemployment was much higher tha now and Australia's terms of trade were far worse. Regardless of what the risk turned out to be, it certainly did not feel like a low-risk time while we were living through it. In hindsight, like all recessions, it was an opportunity.
For buying into your own home, you may want to split the risk into three sections (derivatives, if you will.)
1. Absolute risk - what is the risk that I will get into a financial situation I can't handle if I buy? -- how long can I keep up the payments if I lose my job? How likely is that? -- How much can interest rates rise, or other expenses arrive, before I have trouble making the mortgage payments? -- What is the risk that I might have to move inside 4-5 years or so, and possibly be worse-off because of transaction costs? -- What is the risk that I will get divorced or otherwise be forced to liquidate unwillingly in the next 5 years?
This risk can be mitigated through simple prudence. If you think you can afford a 500k property, then buy a $430k property. Make sure you keep a liquidity buffer. It's the most serious risk.
2. Timing risk -- What is the chance that I will have a better entry point if I wait? -- What is the chance that I will have a worse entry point if I wait? -- What is the risk that interest rates will go up and reduce my ability to get finance in the future? -- What is the risk that the alternative investment I have for my deposit will underperform/outperform the housing market?
This risk can be mitigated by watching the market carefully. You might also get the added bonus of an excellent entry point through finding a place you like that needs to be sold quickly. (Deceased estate, divorce, etc.) This kind of opportunity only really happens in slow markets. Once the market turns up, they disappear. Right now, the lowballers are having a field-day. Picking up a place at 10% under market value mitigates a lot of entry-point risk.
This is the least important risk. In the medium-term, only ego is at stake and in the long-term, entry point is of little significance as long as you could afford it at the time. You are buying for consumption, not investment. (except in the sense that the own house offsets some of your need for investment in super.)
3. Long-term risk -- How well am I covered for the cash-flow of rent after I stop having income? -- really this is a bet on how good your super plan is and whether it will be any good when you retire. This bet worked out really badly for anybody who has retired so far. Currently working people's mileage may be different. My parents are in strife at the moment because their super plan - a mixture of bonds and shares like almost all plans - has performed abominably the last 2 years. They are fortunate in that they don't have to pay out rent and can significantly reduce their withdrawals without going hungry - thereby preserving capital.
This is the second-most important risk.
Possibly the biggest consideration is how much utility do you get ot of owning your own home? I know people who just don't want the hassle of owning a place and actually prefer to rent. I know others who feel insecure having to renew a lease every year. If you decide you prefer the freedom of renting, I would suggest accumulating alternative hard assets to go with the paper assets, just in case. Your saving rate will need to be a bit higher, but it can be done. The worst part of it will be listening to all the people telling you are an idiot for not buying. I rent in Beijing and get that all the time.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
There is perceived risk and risk in hindsight. Then blah blah blah...
Thanks guys
What I am referring to is home loan affordability for the average Mum and Dad or average first home buyer.
Australian property prices are very high relative to average household incomes. Affordability is low. Buyers are being priced out of the market.
Unless they take out very large home loans over 30-40 years. This is not sustainable.
Why would a reasonable person take out a very large home loan and buy a property in a flat and in some parts declining property market. If the property market drops the buyer will be locked into a high paying mortgage and lack flexibility.
The risk is high.
You can quote all the technical calculations you like and put forward complex comprehensive arguments against this. Yes try to baffle people with _ullshit.
However the average Australian comprehends that property prices are high and the only way to buy property is take out a very large home loan. In a declining property market.
However the average Australian comprehends that property prices are high and the only way to buy property is take out a very large home loan. In a declining property market.
The risk is high
High compared to what?
High compared to negative real returns in cash? (or barely positive depending on your tax bracket)
High compared to negative nominal returns on shares since 2000? (and probably massively negative returns over the next 12 months.) How's your super doing this week?
High compared to approx. 5%/annum rises in rents?
Average Australians have shown that they consistently get these things wrong. In fact doing exactly the opposite of what the masses are doing has always had above-market returns over the long haul. Most Australians will wait until they have to take out an even larger mortgage in a rising market.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
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