Morgan BellPerth Property Boom and Crash
December 14th 2006 17:28
Property investing is so deeply-rooted in Australians’ traditions that I wonder whether it is in fact so compensating as it is propagated. In this article I analyse property yields and capital appreciation and compare them with shares. Stay with me for more.
The news today, 14 December 2006, is that “boom conditions in the Perth housing market are set to taper off next year, a leading forecaster says.”
“But ANZ senior economist Ange Montalti sees no collapse in prices. He is tipping the Perth market will rise a further 12.3 per cent next year before falling 1 per cent in 2008.”
“Perth prices have surged in recent years as most of the rest of the country has flagged. According to the Bureau of Statistics, they climbed 45.9 per cent in the year to September 30, helped by the commodity boom and land shortages.”
“A typical house in Perth is now more than 15 per cent more expensive than in Melbourne, data shows.”
““Property prices are growing faster than wages are,” he (Michael McNamara, from the Fairfax Media-owned Australia Property Monitors) said.”
““At some stage people’s capacity to pay creates a natural ceiling on the market.””
This news was published in the online version of The Age under the title “Perth property boom to ease” and was written by Ben Schneiders. Click here to open that page.
I must be honest with the reader straight away: I do not feel any attraction for habitational real estate investing, which, judging by the last boom, is a national passion.
I don’t even think much of housing style real estate booms.
To my knowledge, housing price increases in boom time do not reflect a drastic increase in the input costs such as labour or materials – they are merely an inflationary experience resulting from too much money chasing few properties.
Once a trend characterised by an increase in house prices is in place, all want to buy and later sell for a lot more and so make their little speculative gain. Yet, there is no added-value at all on the house side. Its all just speculation and inflation.
One of the most direct results from this is the fact that young people who want to buy their property find it harder to do so.
Another is that, after the bubble bursts, so many investors find themselves with a mortgage which is greater than the appraised value of their property.
Seen this way, I applaud the interest rate increases imposed by the Reserve Bank.
On the investment yield side, I often hear proprietors say that housing pays for itself.
You buy an apartment in addition to your house and put it for rent. This is supposed to pay for the investment loan. The question I ask is this: how much are you making and how does that compare with shares?
Let's see some of the figures.
If, as my neighbours did, you buy a one bedroom apartment for $242,000 in the inner Sydney and rent it for $170 per week, assuming that it’s occupied for the whole year, your rental income for this property is: 170*52=8,840. Now, let’s find the yield: 8,840/242,000*100=3.65%.
This rent yield of 3.65 per cent is not impressive to me.
If we compare it with shares we will find out that most blue chip companies pay a regular dividend yielding somewhere between three and five per cent.
And notice that dividends from companies that source their income in Australia are generally franked, which in practice means that you may not pay any income tax on them. Rent proceeds, though, fully pay income tax.
If you consider in the calculation of the rent yield the myriad expenses that must be deducted from the rent income, such as real estate agent management fees, Council rates, regular repairs and insurance premiums, your effective rent yield would be much reduced from the above figure of 3.65 per cent.
You wouldn’t need to be a genius to work out that leaving the money in the bank for a safe 6.25 per cent or more would be a much better proposition to all the hassles of owning real estate for investment.
Finally, considering now the capital appreciation side, it is a proven fact that the stock market, in any given 10 year period, outperforms the real estate market.
So, why are people still attached to housing as a way of making money?
I see only two reasons: one, real estate makes you proud of yourself and brings up the envy of your friends; two, shares are a subtler thing to play with and you have to learn finance.
End
The news today, 14 December 2006, is that “boom conditions in the Perth housing market are set to taper off next year, a leading forecaster says.”
“But ANZ senior economist Ange Montalti sees no collapse in prices. He is tipping the Perth market will rise a further 12.3 per cent next year before falling 1 per cent in 2008.”
“Perth prices have surged in recent years as most of the rest of the country has flagged. According to the Bureau of Statistics, they climbed 45.9 per cent in the year to September 30, helped by the commodity boom and land shortages.”
“A typical house in Perth is now more than 15 per cent more expensive than in Melbourne, data shows.”
““Property prices are growing faster than wages are,” he (Michael McNamara, from the Fairfax Media-owned Australia Property Monitors) said.”
““At some stage people’s capacity to pay creates a natural ceiling on the market.””
This news was published in the online version of The Age under the title “Perth property boom to ease” and was written by Ben Schneiders. Click here to open that page.
I must be honest with the reader straight away: I do not feel any attraction for habitational real estate investing, which, judging by the last boom, is a national passion.
I don’t even think much of housing style real estate booms.
To my knowledge, housing price increases in boom time do not reflect a drastic increase in the input costs such as labour or materials – they are merely an inflationary experience resulting from too much money chasing few properties.
Once a trend characterised by an increase in house prices is in place, all want to buy and later sell for a lot more and so make their little speculative gain. Yet, there is no added-value at all on the house side. Its all just speculation and inflation.
One of the most direct results from this is the fact that young people who want to buy their property find it harder to do so.
Another is that, after the bubble bursts, so many investors find themselves with a mortgage which is greater than the appraised value of their property.
Seen this way, I applaud the interest rate increases imposed by the Reserve Bank.
On the investment yield side, I often hear proprietors say that housing pays for itself.
You buy an apartment in addition to your house and put it for rent. This is supposed to pay for the investment loan. The question I ask is this: how much are you making and how does that compare with shares?
Let's see some of the figures.
If, as my neighbours did, you buy a one bedroom apartment for $242,000 in the inner Sydney and rent it for $170 per week, assuming that it’s occupied for the whole year, your rental income for this property is: 170*52=8,840. Now, let’s find the yield: 8,840/242,000*100=3.65%.
This rent yield of 3.65 per cent is not impressive to me.
If we compare it with shares we will find out that most blue chip companies pay a regular dividend yielding somewhere between three and five per cent.
And notice that dividends from companies that source their income in Australia are generally franked, which in practice means that you may not pay any income tax on them. Rent proceeds, though, fully pay income tax.
If you consider in the calculation of the rent yield the myriad expenses that must be deducted from the rent income, such as real estate agent management fees, Council rates, regular repairs and insurance premiums, your effective rent yield would be much reduced from the above figure of 3.65 per cent.
You wouldn’t need to be a genius to work out that leaving the money in the bank for a safe 6.25 per cent or more would be a much better proposition to all the hassles of owning real estate for investment.
Finally, considering now the capital appreciation side, it is a proven fact that the stock market, in any given 10 year period, outperforms the real estate market.
So, why are people still attached to housing as a way of making money?
I see only two reasons: one, real estate makes you proud of yourself and brings up the envy of your friends; two, shares are a subtler thing to play with and you have to learn finance.
End
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