Housing Affordability Australia wide

Did you read what he said? He's an idiot. Also his quote has nothing to do with real estate prices.

And for the since you seem unaware, the myriad of reasons for house prices differ per suburb so yes in some places house prices will and can outstrip local wage growth simply because wage growth for suburb x is not a limiting factor.

 

Yes, but not forever. See aforementioned math.

 

No Grantham is not an idiot. You're simply not grasping the implications of an exponential series, which was the point of the Egyptian example.

Let's assume that wages are growing relatively slowly, say under 4% a year, and property value are growing by 7% to 10% a year, then you might see the real price of our apocryphal median Sydney block doubling every decade. So in 2025 it would cost the equivalent of $2 million in today's prices.

OK, so we can subdivide and build townhouses in order to keep some semblance of affordability. But at some point you're going to hit a limit. In 2115 the block would be worth a billion dollars in today's money. (Your descendants will thank you for your foresight.) The only way affordability might be possible would be a hundred storey tower with ten small apartments on each floor.

Push further into the future, and it becomes worth a trillion dollars (in 2015 terms) in 2215. A couple of decades after that the annual growth will probably exceed Australia's GDP.

Eventually you get to the stage that @HomePage highlighted that you run out of people to live in the space, or you hit a physical limit as to how many liveable properties you can squeeze onto the block.

OK, so 7% in real terms is obviously unsustainable. How about 2% or 3%? You'll get the same result, just the timeframe is pushed out.

If you look at any long term studies of property prices then the trend is that growth will track wage growth and inflation. Robert Schiller, who knows a thing or two about property bubbles, pointed that relationship out.

Another fun fact for you: The total value of Australian real estate rose from $5.5 trillion to $6 trillion last year. Given that the growth was largely driven by Sydney, there's a very good chance that its value increased by more than New Zealand's GDP. Both have similar populations...

 

You can dispense with land sizes, subdivision and all that and focus on only two variables: mortgage size and wages.

Mortgages are supported entirely by wages. Mortgage size is directly related to property price. The higher prices go, the higher mortgages end up.

You cannot have mortgages increasing by 10% per year while wages are flat or hovering around 2% per year.

When a house rises from $300K to $350K, the potential pool of buyers shrinks because the mortgage moves out of reach of their wage.

$350 - 400K it shrinks again.

It really is the simplest mathematical explanation of why prices cannot outpace wages forever. There must come a point where the price increases have shrunk the pool of borrowers to such an extent that no further sales are possible.

The people who accept that prices cannot outpace wages but still want to spruik property to you say things like "prices will stabilise and wages will catch up before the next boom".

That sounds wonderful but they are ignoring the fact that negatively geared investors (who make up a large part of the market) MUST have capital growth for them to profit. They cannot hold a property with an I/O loan for ten years losing money each year if the capital gains don't eventuate.

The rising property market requires credit expansion - this is usually in the form of higher and more mortgages but is also in first home buyer grants and legal and illegal foreign money.

If the total amount of credit in the market isn't increasing then you will see price deflation as speculators cannot hold their properties.

So there cannot be a price "stabilisation" and wage catch-up. The flat prices would have to hold for two decades unless wages suddenly went up quickly (which they have no reason to).

Think of all those I/O investors betting on capital gains and imagine what they'll do once their capital gains don't eventuate. Perhaps they can hold a year, maybe even two. But past that? Sell-off time.

 

100% correct.

And that is what I have observed....flat wages leads to flat property markets down the track....then the wages catch up and off it goes again for a bit.

What does happen though throughout all this is; the lending businesses look for new ways to allow folks to borrow more.

Is that bad? Yes and no....

No-one is holding a gun to folks' heads and making them sign up for the new lending products.

 

100% correct. Nothing can increase exponentially forever, especially the housing market. However, the vast majority of IP investors have an investment timeframe of not much more than 30 yrs. Australia will grow it's popln till at least 2050 - the figures work well till then. Does anyone really care about the subsequent 2,965 yrs ?

 

Yes he is an idiot. He actually compared the physical size of one widget and thought that it would remain the same throughout thus proving growth impossible.

The rest of your post is you attempting to extrapolate something from his idiotic comment. You would have been better off making your own point then using this idiots quote that has nothing to do with the property market.

 

When houses were $200K, that 10% increase was only $20K. When houses are $800K the increase is $80K.

Investors who are looking for 10% a year now require extraordinary price increases to maintain that ROI - something that frankly is impossible.

Even trying to hold a property for five years starting from a high base may prove to be a losing proposition.

 

Unfortunately i think there could be a room for a far greater disparity between wages and house prices in cities like sydney. Have a look at london. Average property price is just over 12 x average wage. Property prices dont have to reach ridiculous multiples for most people to be priced out of anything desirable.

Global cities are not a closed system. International money moves. Price pressure in london comes from the top down and people(workers) at the bottom are willing to spend 10+ years renting rooms in share houses before they give up and move elsewhere, to be replaced by the next batch.

People dont just stop buying homes if their average wage cant afford it. They either; a) buy further and further away. Ive met people working in london who had a commute that was 2+ hours.
b) adjust their expectations of how much they can compromise on space. There are lots of londoners living in 2 or even 1 bedroom flats with a children with no hope or expectation that they will eventually graduate to a house.

And then, even if average wage earners refuse to buy the crappiest, small apartment enough of them choose to rent indefinitely and leave buying property to those who can afford it and the rest give up and buy elsewhere, and are instantly and constantly replaced by the next batch of 20 somethings.

Im not saying that sydney or melb have the right conditions to develop a property market like london or that prices relative to wages can keep growing indefinitely. I just disagree with the idea that average wages will limit property prices to a sane level or that we are necessarily close to reaching the maximum ratio of wages to prices.

 

You are quoting averages by the sounds of that statement?

They are so inaccurate it's not funny, and should never be considered unless you are looking at a particular suburb's historical data.

Houses don't go up at the same rate at all.

Some markets move a lot in a short time, others not at all for ages.

For eg; we bought a house for $480k in Red Hill. It doubled in value in 3 years...pure luck - we didn't buy with any investment purpose in mind at all; other than to run a B&B from it.

Then; bought an IP in Highett a few years later (our 2nd IP) for $206K...in 3 years of owning it the value went up 10%. Fabulous failure after all costs were considered.

Investors study the markets to ascertain which locations might deliver a better return based on certain factors. Often it doesn't happen, or it might after many years if they hold it long enough.

But, that's the risk with any investment.

By the way; not many investors are buying $800k houses. The returns are cr@p on a properties of that price range, so only the very smallest percent of investors who are able to service the massive neg cashflow would consider (and even be interested in) buying them.

It is a pointless price range to use for the argument.