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Apparently house prices are 30 percent under valued

Discussion in 'Property Market Economics' started by Beelzebub, 8th Jul, 2015.

  1. Beelzebub

    Beelzebub Well-Known Member

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  2. Darren A

    Darren A Well-Known Member

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    Wasn't the RBA saying that Sydney was in a bubble, now someone from the RBA is saying that house prices are undervalued.

    The should be reporting on the different cities and areas within Aus.

    The property bears would have a field day with this.
     
  3. LibGS

    LibGS Well-Known Member

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    They are saying that the difference between buying and renting is 30%, it costs 30% more to rent.

    I'd like to see some modelling as to what would happen if house prices rose 30%. I would think there there would be a flow on effect to IPs and the gap would diminish, but would still be substantial.
     
  4. Bayview

    Bayview Well-Known Member

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    To buy a house with say; an 80% P&I loan, then having to pay Council rates, building and contents insurance, water rates, maintenance costs at today's interest rates of say; 4.5% adds up to more money that a renter who is in that same house paying say; 5% rent on the value of that same house.

    The renter has no rates, no maintenance, no building insurance costs.
     
  5. Bayview

    Bayview Well-Known Member

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    If house prices rose another 30% (but what time frame?) we would see a very poor rent yield until the rents caught up with wage rises.

    This has always been the case; property rise, poor yields, property stagnates, rents increase and close the gap.
     
  6. C-mac

    C-mac Well-Known Member

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    Well, keeping it Sydney-specific, I personally think that rents are still too high and we will see them come back down when all these mountains of new unit stock, dump on the market of course.

    Only rents that will keep through the roof will probably be:

    -Super wealthy tier #1 postcodes
    -Houses in suburbs of good school catchment zones (people will still pay a premium in this to get into catchment so their kids have a great public education)

    I cannot comment on other markets except perhaps Brisbane as I don't know the rental dynamics of other markets.
     
  7. Angel

    Angel Well-Known Member

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    The way these guys have calculated their data is interesting, I haven't noticed this before. It points to a different way of thinking about the topic than we usually do.

    Dr Tulip and his co-researcher compared the cost of renting and buying identical properties, avoiding the common trap of comparing national average rents with national average prices. Because owned homes are typically "bigger and nicer" than rented homes, a lot of the apparent price difference reflects a quality difference.

    They calculated the annual cost of a bought home from the purchase price, the transaction cost, the expected mortgage rate and the running and depreciation costs offset by expected capital gains.

    The annual cost of owning a home bought in April was likely to be 2.7 per cent of its value. The annual cost of renting the same home was likely to be 3.9 per cent.

    "So you can either pay 2.7 per cent of the value of the property to buy, or you can pay 3.9 per cent of the value to rent," Dr Tulip told the conference.

    "The undervaluation is 30 per cent.