ABCDiamond

It was my Dad, I asked him the other day what his first house was

littda01

The spread of mortgage cost v rental cost is absolutely crazy IMO. The place I rent (Melb) would cost around 50% more per month for me to buy, WITH a 20% deposit.

My colleagues explain this to me by saying that investors can offset the mortgage interest and much of the rental cost against tax, and so plenty rent at a loss in the hope of equity gain. Obviously the staggering amount of equity gained over the last few years means that theres a significant number of people who can afford to buy places for cash and rent them out, or buy lots of places and rent at close to breakeven.

I also read that in Melbourne, 50% of new mortgage lending is for investment properties. If thats not a bubble...?

So then there's basically 4 reasons why rents are low compared to mortgages

1) Enough landlords have significant equity whereby they can afford to rent well below what the place would cost to buy & see decent return on their investment, as well as potential equity gains.
2) Some landlords are taking losses, offsetting v tax, and hoping for equity gain.
3) Demand - what people can afford to pay (though frankly this is less important IMO).
4) Relatively high interest rates (compared to other countries), which push up mortgage costs but dont totally filter through to the rental market, because of 1 and 2.

This is a LOT different to when I was in the US, where often it was more expensive to rent than to buy, equivalent places. This was because an owner/occupier could claim mortgage interest as a tax break, whereas a landlord could not. (other reasons too, but that seems the main one).

So where do we go from here? IMO, the world economy is the answer. If things continue to go bad, Australian banks will tighten up, killing a lot of the demand, both for investors and buyers. If that happens, its pretty easy to see a downward spiral. IMO, that would have more impact than interest rate rises (which anyway are only likely in a booming economy).

Interested to hear what others think.

ABCDiamond

That depends on the location...

• Sydney from Dec 2002 to Dec 2009 had an average annualised growth of 4.25% per year. (Some areas a lot higher, but many lower)
• Hobart however did better with 15.45% per year.

However this tax system does allow rents to stay low, and avoid severe housing problems, where Governments do not have to get over involved in community housing, "Council Estates etc", because property investors take care of providing such a large amount of rental property at lowish rents.

coolshadows

source: ABS on 04/08/2010

ABCDiamond

And here is the graph...



Notice how Sydney went down from $550k to $450k and then back up to $600k.

But still less than 5% per year since 2002.

Zambia

As Kenny rogers said
"You got to know when to hold em"
"You got to know when to fold em"
"You got to know when to walk away"
"Know when to run"

Your the only one at the table who knows your hand...

littda01

ABC - Median house price on a city basis is not really a great indicator of potential equity gains, IMO. I was speaking of Melbourne, not sure about other areas.

In hot Melb areas and market sectors, its been common to double value in 5 years or even less (3 yrs of +25% is doubling, and there are suburbs which have gone up close to 40% some years). At worst, in 7 years.

A lot of this has happened in the market sectors where you find a lot of renters, and obviously the two are linked. The rental market for $1.5M+ homes is a lot smaller (my guess).

So I would not say its an exaggeration to call the amount of equity out there staggering - the Economist report would point to that, if homes are 61% overvalued its because of an equity balloon.

ABCDiamond

I did say "That depends on the location..."

But I agree IF a home is 61% overvalued.
But there are many homes available for sub $300,000, even under $200,000. Are they also overvalued by 61% ? Should they be only $186,000 or $124,000.

How is that 61% overvalue calculated ?

littda01

Agree that the 61% figure may be arguable. I guess its calculated from some combination of long-term average wage versus median price.

Usually they say if its more than x times the average wage for that area/country, then its overvalued. IMO that method is a bit flawed in that real prices of pretty much everything else have been declining. So 40% of your wage in 1970 left you with far less purchasing power than the same situation today.

But I think growth of 20% plus in many places over many of the last 10 years is itself unsustainable, so whether the overvaluation is 60% or 40%, its significant.

coolshadows

Truly sounds like a "get rich quick" scheme. You can't lose (if you have the money to invest).

My new rental agent shrugs off any suggestion that prices won't keep jumping up - says everyone should aim for 5 houses each - "better investment guarantee than any superannuation".

ABCDiamond

From December 2002 to December 2009 the average annual growth in median property values has been:

Dec 2002 - Dec 2009

• 4.25% Sydney
• 8.00% Melbourne
• 8.80% Canberra
• 10.70% Adelaide
• 11.80% Brisbane
• 13.65% Perth
• 15.45% Hobart
• 15.05% Darwin

Being average, this means some have gone up much faster, but others slower or even dropped backwards.

Money in the bank would have been better than the average Sydney property. Even the average wage increased by 4.14% per year during that period, so very little real gain in the average Sydney property.

ABCDiamond

As long as you get the better than average appreciating properties, and not the below average ones.

littda01

Not so, unless you are buying the place all cash. If you buy a 500K place with a 100K deposit, the place increases 8% per year for 8 years, and you sell at the end of that, you will sell the place for around $857k, giving a profit of $257K on your $100k investment.

Obviously, there could then be a rental loss but its unlikely to eat too much of that.

Put the money in the bank at 8% for 8 yrs and your profit will be around $71K. A big difference. Thats the beauty of other peoples money :-)

coolshadows

when you put it like that, the Australian property market is a license to print money!

ABCDiamond

The theory of that is good, but it does depend on the other costs. Mortgage interest, repairs etc.

During that 8 years above, the costs will be:
Interest: $225,000
Repairs: $12,000 +
Rates: $16,000
Fees: ?

Expected net rent: $138,000

Net result: Capital gain $257k+ rent $138k less costs $253k = $142k less property buying costs and selling costs, and we are getting closer to the $100k mark.

Still better at the 8% gain, but lousy for the Sydney gain figures for the last 8 years.