Why I believe there will be a price ceiling..

Sorry for starting a new thread on property price predictions. I tried to see if there was an appropriate thread to tack this post onto, and there wasn't one on the first page.

So my basic belief is that there will be a price ceiling at some point in the near future (5-10 years), after which the likes of a 8-10% annual price rise won't be possible. Let me explain why.

If we compare current property prices to 10 years ago, the contributing factors include:

- falling interest rates increasing buying power for the average buyer
- a 'FOMO' effect as prices kept rising, for both owners and investors driving up demand
- influx of overseas buyers, particularly from Asia

But also:

- upgrading buyers left with healthy gains when selling, allowing them to step up to more expensive properties

We are now at a point where many of these contributors have run their course.

- interest rates can't fall much lower
- a sharp drop in the number of investors in the market as well as overseas buyers disappearing

A bit about myself - we are in Sydney, in our late 30s, looking for a 3 bedroom freestanding house in the north.

We have a $1.8M budget, with $1M in the bank.

We are both professionals with a decent pay packet, but the $1M cash holding (or 'war chest' as I like to call it) was in large part thanks to capital gains on our two previous PPORs, both of them apartments. I made gains of 190K on the first, and 240K on the next.

The buyers we are competing with for the $1.8M house will have had similar gains on selling their previous properties.

But what about in 10 years when I want to sell up and move up?

A hypothetical buyer in 10 years, a professional couple the same age as we are now, with the same income (adjusted for CPI) most likely won't have made the kind of capital gains from buying and selling entry level properties as we did. A case in point - my first apartment that I sold for 190K more than I paid, was sold at the exact same price I sold for, 3 years later (I know this is just one example, but the room for gains are getting smaller with entry level properties most of which are apartments).

So the budget of this hypothetical professional couple will be significantly lower than the $1.8M budget we have now, even though their income is the same. So which type of buyer will take my house off me at significantly increased prices? If we see a similar style of property boom for the next 10 years then the $1.8M house will be $3-3.5M, and we all know the crazy boom is over, but will it even grow a meagre 30% in 10 years and fetch $2.35M? Who will be able to afford $2.35M three bedroom house in the north?

So far, most of the buyers in the $1.5M+ budget will have made significant capital gains boosting their cash holding/ deposits, but over the next 7-10 years, there will be less and less people in this category IMO.

This is the main reason why I believe there will be a price ceiling. The once in a lifetime boom was due to a series of conditions that won't be reproduced, and property buyers in 10 years (the current millenials in their 20s and early 30s) won't have the buying power people in their 30s and 40s do now.

I'm very well aware of countless property predictions who have been completely wrong in the past 10 years, and am happy to be proven wrong.

Thoughts?

 

I’m still a bit confused about how people refer to this as a once in a lifetime boom. Are booms a new thing? Brisbane quadrupled in the early 2000’s...or does modern history only start in 2008?

 

It seems to me things repeat but its taking longer! If you look at previous cycles it shows the whole property doubles every 10 years is taking longer. My parents property doubled every 7 years from 1977 to now. Next 50 years could be a different story...

 

Crazy what it did in that cycle!

 

I'm not sure what you mean by 'in the nearly 2000s', but if what you're saying is that Brisbane had a crazy property boom 20 years ago, then maybe it was a Brisbane property boom and nothing like the Australia-wide boom we've seen in the last 10 or so years?

 

*early not nearly. Typo.

So you think that was some unique moment that happened once, never happened before and never will again? I’m curious how old you are? If you think prices will hit a ceiling, why is that? Cause it’s too high? You know what happens when it gets too high? It either falls or stagnates. Say it stagnated for a decade. No let’s go crazy and say it stagnates for two decades. You don’t think there might be a correction 20 years from now? I hate to tell you but you or I are not special enough to be alive to witness some unprecedented economic event that is so unique it never has or will be repeated again. We ain’t that special / lucky.

 

Doubling every 7 years for 44 years is amazing. But will it double again in 7 years? Will a $1.8M house be $3.6M in 7 years?

I doubt it. With each doubling, the absolute increase in prices is larger.

A newborn baby's weight doubles every few months from birth also, before reaching a ceiling, with a much more modest weight gain thereafter until they reach adulthood.

When property prices went up 50%, lots of people said it became too expensive, but I tend to think that the prices before the 50% jump was cheap.

But with the average Sydney house price being around $1.1M, I believe it is reaching the limit of what most people can afford unless their budget got a huge boost due to capital gains. And opportunities for capital gains from entry level properties are getting smaller IMO. This is based on just my observation and anecdotal evidence only.

 

Who said anything about doubling every 7 years. I’m just disputing the idea that any boom is a “once in a lifetime” event, be it 7 years or 20 years from now.

 

I've already said in my initial post that we are in our late 30s.

Your post agrees with a lot of what I posted - that prices will hit a ceiling/ prices will stagnate. That is exactly what I think will happen. Gains will slow down over the next 10 years for the reasons I've outlined.

No I don't think we are unique or special people witnessing some unprecedented economic event that will never be repeated, but the drivers of the increase are running out of steam to the point that growths will slow down.

I'm not predicting a fall in prices, just gradual stagnation with marginal gains to come.

 

Will prices doubling in 20 years be called a boom? If you take the CPI into account that's hardly an increase.

 

Yes someone who buys an asset in year 20 that doubles in year 21 would probably think of that as a boom.

 

I have no idea what household incomes are on East Coast. I can't see wages going up much. Interest rates will rise if world recovers from Covid. You can only spend what a bank loans you. 12 months ago people in Perth believed houses were over priced they were what? Half East Coast prices. Surely East coast capital city prices must be close to max possible

 

Inflation.

What happens in 20yrs time when people are on double the salary they are now & apples are $15kg?

House prices don’t need to increase. However, The amount of money you need to purchase the same thing will be different in 10,15,20yrs time.

 

I don't understand what you mean by 'year 20' and 'year 21'.. sorry.

You suggested a doubling in price over 20 years would still be a boom, but I'm challenging that idea, because to me a boom is a significant increase in prices in a relatively short time.

 

So properties stagnate for 20 years, then boom in year #21.

I'd wager the person who bought in year #20 will probably think of themselves as having done well.

 

I agree with this.

For me a price ceiling is the maximum price the market can afford.

As prices increased people still bought as they either:
a) used capital gains from selling property to climb the property ladder
b) bit the bullet, made sacrifices and stretched budgets to buy their first property

But wages are stagnant, and rates can't fall any lower, and people are running out of things to sacrifice in order to purchase property.. IMO.

 

Double in 20 years is CAGR 3.5% so minimal growth in real terms...assuming inflation around 3%.

 

Sure but CPI increases are what, 2-3% per year?

If prices only increase 2-3% per year, that is the kind of stagnation in price (as opposed to 8-10% increases we are used to) that will see my 'price ceiling' prediction come true..

 

Population growth when immigration starts up again, gentrification, redevelopment?

 

If property stagnates for 20 years, that means my prediction of 'price ceilings' will come true, and stay true for 2 decades?

Discussing the definition of 'booms' and over what period is a digression from the discussion I feel.. so maybe let's agree to disagree there.