Housing Affordability Australia wide

All I'm saying is - and as the RP Data/Core Logic report says - regional residential property is generally an under-performing investment compared to the capitals. Capital cities have all the services and most of the Joe Hockey 'good jobs', it's only logical that they're a better bet.

 

Some property people tend to panic when they realise that the mathematics of an exponentially-exploding housing market going on forever are impossible, but it's not a bad thing. Really clever investors manage to make money on the way up AND on the way down. And agents & financiers are always winners in times of high activity regardless of the direction.

 

Jeremy Grantham came up with an example showing that exponential growth is impossible over the long term. Here's a summary:

Imagine the entire wealth of Ancient Egypt consisted of a cubic metre of chattels. It doesn't matter too much what it is. Now assume their wealth grows by 4.5% in real terms over the 3,000 year history their empire survived. How much stuff would they have at the end of it?

When this question was posed to quants, who are the rocket scientists of the financial industry, none of them got the number right without using a calculator.

The answer? Grantham said that they'd need 2.5 billion solar systems to stash their possessions in. By my calculations it'd fill a cube of 1,400 light years on a side.

The moral of the story is that humans suck at visualising the limits to exponential growth even when they're highly numerate.

 

However, that is not how the housing market works. How many extremely expensive 1/4 acre blocks are there in Sydney CBD ? None, but there are lots of below-median high rise apartments that weren't there before.

Individual properties (like the ones we buy) grow exponentially up to a point. Then they become too valuable to be used for just one family, so they get sold for a motza & subdivided. This has the effect of adding 1 to the total number of houses, and as each new house is not as valuable, the median house price is reduced.

As an example - imagine a city has 100 houses with a median of 500K. The most expensive one gets sold for $1M and subdivided - there are now 110 apartments, The 10 new apartments are each worth $450K therefore the city median value will drop a little. And no house will ever get so expensive that it isn't put to a higher use.

After another 25 yrs, they get converted to a 6 pack, and 25 yrs later to apartments. This has the effect of keeping a citywide average at an acceptable level, while each individual house DOES grow exponentially.

Grantham is using a fixed qty of chattels (OTOH new houses are built all the time), and also not providing for chattels to change in character (from 1/4 acre block to 150 apartments). That example in no way relates to the housing market.

 

That is quite literally the dumbest thing I have ever read in my life. Is the man an utter *****? Growth is not simply widgets increasing in quantity over time. In relation to the housing market it would be taking say a quarter acre block with a post war house on it housing 2.4 people, knocking it down and building a 10 storey apartment housing hundreds.

 

There's this little thing called zoning.

 

Some sweeping generalisations in what you have posted, you cannot compare large diverse regionals with mining centres which have run exceptionally hard. Those that have seen the greatest growth are some of those most affected by weak prices for coal and iron ore, at this point in time many regional centres are weak but this is no different to downturns we have seen in all capital cities previously.

 

Big regional centres don't have the diversity in the local economy to support the town when there's a downturn; I've seen this in operation myself when a large employer leaves. Because of their large, reliably increasing populations and the money they attract capital cities are much more desirable for property investment - that RP Data/Core Logic report clearly supports what I'm saying because the biggest proportion of resale losses are in country and regional areas.

 

I'm not disagreeing with the data, presently many people selling in certain regional locations are taking a hair cut, no doubt.
Picking one moment in time though doesn't make a good argument IMO. We could look at purchases in Brisbane 2008 until recently or a Sydney purchase in 2004 or Perth at the wrong moment =same outcome.

 

For sure, capital cities also have their own trajectories too... for example people who bought two years ago in Perth have been experiencing a moderate slump. That's the nature of a housing market, very much connected to the vagaries of the local economy; however I would still rather have an IP in Perth than in a large regional town.

 

I would like an IP in Perth as well as over the long term it should do well. Its probably the next place I will be looking at in a couple of years. Whether it will do as well or has done as well over the short to medium term as somewhere like Toowoomba, Wollongong or Bathurst though is a matter of opinion.

 

A 100 fold increase in people density for said quarter acre block development equates to 6.8% density growth over the 70 years since WW2 ended. Grantham is talking over a 3000 year period which, extrapolating your density growth figure of 6.8% pa alone, would equate to a people density of 1.242 x 10^86 people per quarter acre over that time. You're still going to need taller apartment block of Grantham-estimate proportions to accommodate all these peeps.

 

You could fit every single person on Earth right now into a state the size of Texas (which mind you is smaller than NSW) and give each person 100sqm to themselves.

Grantham is an idiot. Simple as that.

 

Good point. That's why land increases in price when it gets rezoned. I bought a house in Perth when it was a 2 unit site. Then council rezoned it to be a 4 unit site. The value went up. Then the State Government changed to ruled to allow 10 apartments to be built on the site, and the value went up again. Behind us, there were 2 dilapidated houses. They got knocked down and replaced with 24 apartments. So there are now dwellings for 24 singles and families where there was previously only 2.

 

I don't think you'd want to buy an investment property in Perth right now though - it would be like trying to catch a falling knife.

 

Yep.

 

I'm keeping my eye on the Perth market but prices appear to continue declining. No point buying in a declining market.

 

Calling Grantham an idiot because you don't like the specific example he chose to demonstrate the 'exponential growth can't carry on forever' concept doesn't change it. There may be a few more weeks, years, or even decades, left of seeing house prices outstrip wage growth like we have experienced in the last half century in Australia, but relatively simple maths will ultimately put a stop to it.

 

Isn't exponential growth unsustainable by definition? Talking from purely a statistical point of view.

 

Not in Australia ......



Yet