Can property prices outpace wage growth?

From Zero Hedge...

Property anywhere anytime can't KEEP rising faster than wages. That's just arithmetic. Australia's long love affair with property has been on steroids for 18 years now. Banks, promoters, financial advisers and even sections of government, have been driving the Ponzi (that's what it is - cash flow negative and dependent for success on endless capital gain). Half of Parliament is into it. The average buyer - investor or owner-occupier - thinks this is just the magic of the Aussie property market and sees no end to it.

The 18 year boom has been due to specific factors (1) population increase by 50% in 40 yrs due to accelerating immigration (2) they all settle in the major cities, so (3) relative shortage of supply (4) tax subsidies favoring investors i.e. negative gearing during ownership + 50% CGT deduction on sale - to the point that more houses were being bought by investors than owner occupiers (5) progressively falling mortgage rates 2y to artificial rate suppression overseas, that the RBA has been forced to follow (6) lenders in Aus short of local deposits sourcing > 50% of their funds from huge overseas capital markets at low rates (7) Chinese buying - like Vancouver (8) bonus-fixated bankers pumping loans as fast as they were able (9) dramatic rise in interest-only lending to > 50% (10) regulators initially blind to the issue then frightened to do anything about it (11) foolish govt that sees housing as wealth creation, when its only wealth transference (12) most importantly - no recession for 25 years; due to China's massive appetite for raw materials. There's a generation in Aus that has no conception of recession, wouldn't believe it could happen, who've been encouraged by lenders to buy everything on credit. So Aus has the 4th highest personal debt in the world, there was no deleveraging after the GFC, and it's still rising.

Several of these factors are now reversing, some rapidly. Just how far property will fall is unknown but largely dependent on China, because if China sags then Aus will hit the deck and its banks will cop a hiding.

 

Zero Hedge is a ******* insane Austrian school finance blog run by two pseudonymous founders who post articles under the name "Tyler Durden," after the character from Fight Club. It's essentially apocalypse porn. It has accurately predicted 200 of the last 2 recessions.

Zero Hedge - RationalWiki

 

Classic trump tactics, discredit the source, not the material in it

 

Of course house prices can outstrip wages and will keep doing so. Up until the 1980's, a single income was sufficient to buy a house for a FHB over a 20-25 year term.

It then became the income of both wage earners over 25-30 year term.

Soon, it'll be intergenerational incomes over 50 years.

Locals may bit be able to enter the market but these prices will be cheap by world standards and immigration will drive prices.

 

Extending the term has decreasing impact on capacity to increase the amount. Impact is limited here IMO.

Intergenerational incomes is an interesting concept. I would prefer things don't go that way. Have many places gone this way in a modern economy?
Going to run problems for the next generation when the last two are tied to the same mortgage, who's stepping in for the next next generation when the two previous are up to the hilt?
New concept to me so mulling this over in my mind while I enjoy a wine

 

I'l mull it over a mulled wine too!

I'll throw an example at you:
$100k over 10 year P&I = $993 pcm
15 year P&I = $720 pcm
20 year P&I = $585 pcm
25 year P&I = $505 pcm
30 year P&I = $454 pcm

Increasing the term reduces the monthly payments. The total interest payable increases dramatically (interest rate hasn't changed, just the rate of repayment).

 

Look at 50 years vs 60 years. Diminishing increases, not such a significant increase in borrowing capacity at same monthly input. Anyway, wine

 

Agree with you there @Hodor - 20 to 25 years is a $80 pcm saving, 25 to 30 years is only $51 as the margin between interest and repayment gets slimmer.

 

"Can property prices outpace wage growth?"

Forever? They probably won't, but they can for a long time (as we've already seen) via:

More income earners in a household (e.g. dual income households common now, child's paper run to be added in the future?)
Lower interest rates
Higher LVRs
Longer loans
Fancier loans (IO, shared equity, etc)
Increased government incentives and support
Greater quantity of capital from sources external (e.g. foreign investors)
Lower cost of other living expenses, providing higher % of income to spend on housing

 

Same misguided thoughts, over and over.

RE will be on an upwards trajectory over time. Some stock/locations will do better than others. Regardless of APRA, interest rates, yada yada yada. High demand RE in high demand areas will be on the rise over time. Our job as investors is to determine, when, where and what to buy using what strategies. But make no mistake, prices will rise over time.

Everything else is just commentary .

 

Also, at the very least, the comparison should be against income not wages.

 

Let's look at these factors right now

More income earners in a household - female participation already peaked
Lower interest rates - historical lows, should rise
Higher LVRs - peaked at 105%, declining
Longer loans - also peaked
Fancier loans (IO, shared equity, etc) - APRA
Increased government incentives and support - declining due to political pressure
Greater quantity of capital from sources external (e.g. foreign investors) - increasing taxes / charges
Lower cost of other living expenses, providing higher % of income to spend on housing - has this peaked? Not sure

Quite a confluence of factors... combined with less immigration could be meaningfully negative in the short- medium term...

Wages are important because that determines borrowing power yes

 

I'm sure in the 1980s there were some punters who thought prices in Japan would rise forever relative to incomes / wages.. high demand yada yada yada

 

Can you confirm your belief Leo

Price will rise everywhere over time or just in Australia????!!

 

Prices will rise everywhere except where you buy.

 

You have made yourself clear Leo... you believe Australian property prices will always rise and anything else is misguided thoughts...

I just like to discuss things, hope it's ok for u to have balanced discussion..

 

until you sell then it will rise in massive steps

 

has average wage increase been above inflation rate during the past few yrs at all?

 

Anybody who has the ability to think would know that property can and does go up faster than wages. Property since the year dot has gone up at an average of 8.2%p/a. If wages go up 1.2%, with financing that would increase borrowing capacity about 8%. Anyway blue chip the high growth properties aren't bought by people who rely on a wage in fact low wage can mean more profits to invest. There is more than one side to an equation. Why do people waste time reading and posting BS. Is it because you are desperately clutching anything to confirm your bias?