Graemsay Posted December 8, 2009 Share Posted December 8, 2009 The trouble with a flat market is that inflation is currently relatively low. If the Demographia report is correct (and there has been debate that their numbers are out) then the median house in Brisbane was 6.3 times the median salary this time last year. That number's probably worse now. Assuming 3.5 times the median salary is the historical average (and that can be skewed either way by interest rates), then prices have to fall by 45% or salaries rise by 80% to restore the relationship. If wages continue to rise by 4% per annum then it'll take about 15 years for the bubble to work its way through the system, and I'm sceptical that things will stay that stable for that long. Link to comment Share on other sites More sharing options...
fish.01 Posted December 8, 2009 Share Posted December 8, 2009 The trouble with a flat market is that inflation is currently relatively low. If the Demographia report is correct (and there has been debate that their numbers are out) then the median house in Brisbane was 6.3 times the median salary this time last year. That number's probably worse now. Assuming 3.5 times the median salary is the historical average (and that can be skewed either way by interest rates), then prices have to fall by 45% or salaries rise by 80% to restore the relationship. If wages continue to rise by 4% per annum then it'll take about 15 years for the bubble to work its way through the system, and I'm sceptical that things will stay that stable for that long. I've seen some (ABC?) stats showing that the multiple is not all "that" different from other times so not sure about the figures? Have seen prices stagnant for 6-10 years before though. Personally the house price crash option suits me the best but I'm not feeling too hopeful... Link to comment Share on other sites More sharing options...
Steve99 Posted December 28, 2009 Share Posted December 28, 2009 I've seen some (ABC?) stats showing that the multiple is not all "that" different from other times so not sure about the figures? Have seen prices stagnant for 6-10 years before though. Personally the house price crash option suits me the best but I'm not feeling too hopeful... Seems they base this price multiple criteria depending on which slant they are portraying., That is, people are either quoting house prices are expensive at around 8X median gross income for one person buying the median priced house (if they are portraying a expensive image), or they are using 'household' income(meaning a couples wages combined)and saying that house prices are 4x household income as they were 30 years ago(if they are saying all is dandy in McMansion land). The other thing they get mixed up with is the assumption that 20 or 30 years ago only the male worked and the woman stayed at home, this is of course a load of crap, neither ourselves nor our parents could buy a house and feed a tribe on one income and house prices then were around 3.5 one income. The other flaw currently keeping the VI's happy is the interest rate issue, often quoting that now is a good time to buy with low interest rates, in fact the best times to buy is when interest rates are very high on account of the price will be suppressed by stricter lending criteria, eg, the best time to buy in the UK was in the early 90's when we had 15% rates for a time, dito Australia we had the cheapest multiples of income house prices when interest rates were over 12%.. As for a potential crash, who knows, theyve used up a couple of their magic bullits with the extended first buyers grant (builders, estate agents and bankers grant is more like it) which in fact pushed prices up dramaticaly this year with probably the biggest buying frenzy on record, also they dropped the interest rates which thankfully are now on the way back up. Most booms end and the bigger the boom, the bigger the bust, look at any chart and this house price boom is the biggest in history. Although you are told that prices never drop, well, I know its a long time ago, but in 1890 they reached a peak in house prices in Australia following a pretty big boom, anyway if you bought at that peak it would take until 1950, thats right 60 years before you got your money back.... food for thought. (and that was nowhere near as big as this boom) Another issue is the investment potential of property, we are well passed the stage that property can give a return on investment, perhaps only making 2.5% after costs per year on outlay. You can get 12 month deposits in the bank now for near on 7%, perhaps real invsestors will wake up to that one soon and pull back if they have any sense. Remember, the vast majority of people telling you anything about the property market are self interested VI's, bankers, government, estate agents and the press who gets so much advertising loot from the property sections, they will never tell things as they are with so much at stake for them. As for the shortage nonsense, this has been proved by some clever people to be a complete lie and uses some very tacky assumptions, like for eg, counting how many people are living rough and for each one, we have a house shortage of one. In the mid 90's, there were far more people sleeping rough but house prices were much cheaper due in both cases to a bad recession. You may guess that I am a property bear, and I am but never in my wildest imagination would I have believed how long they could keep the scam (and it is a scam) running and I still wonder as to what 'They' will come up with next..? a reverse tax on price drops? who knows, It does worry me though that they will systemicaly destroy the future economy just to prop up asset prices as opposed to keeping people housed and not in a state of perma-debt for life Link to comment Share on other sites More sharing options...
Graemsay Posted December 28, 2009 Share Posted December 28, 2009 It looks like this thread is turning into a communion of housing bears. :wink: I didn't know about the 1890 housing bubble. That certainly puts paid to the argument that prices will return to previous highs within a couple of years of any bust. I've heard criticism of the Demographia report too. The standard criticism is that house price to earnings multiples don't take into account interest rates and taxation, and therefore is a meaningless comparison. I actually disagree, and think that it's a useful heuristic. The RBA defines mortgage stress as spending more than 30% of gross income on repayments. Working back from there, you can support about 7.5 times salary at a 0% mortgage rate; 4.5 times at 4%; 3.2 times at 8%; and 2.3 times at 12%. Given that mortgage rates have been in the 4 - 8% range in recent years, then a 3.5 times multiple is a reasonable approximation, in fact it's bang on for current rates. Anything over 6 or 7 times is a warning sign no matter how low rates go. As for the different comparisons between markets, most industrial countries have broadly similar levels of income tax and interest rates. I don't have accurate house price and earnings figures, so I can't critique the rest of the report. Personally, my favoured metric is comparing the cost of renting versus buying. Theoretically renting should be more expensive, as the renter has to cover their landlord's costs. I've got a friend who lives in Melbourne, and the gross rent on her apartment is 4.3% when compared to its asking price. (It is, or was, for sale.) Mortgages are currently around 7% (correct me if I'm wrong), suggesting that prices need to halve for it to be worth buying. What's going to be interesting is seeing how the Henry Report affects taxation. Henry pointed out that negative gearing (being able to offset losses in a rental property against overall income) means that a typical taxpayer is taxed at -22% if the IP is set up to make a loss, versus 24% if it's running a profit. He argues that they should be treated identically, which could be politically difficult. Link to comment Share on other sites More sharing options...
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