RP Data August Housing Update

By Leith van Onselen

Above is the RP Data August housing update, presented by Tim Lawless. As always, it’s worth checking out for the smorgasboard of data on display.

Tim’s fairly upbeat this month, noting that the housing market is starting to see various “green shoots”. However, the main negative that could stifle the recovery is that for sale listings remain highly elevated (chart below), and there’s the possibility that the spring selling season could see a large number of homes hit the market, causing a supply glut.

Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.

Unconventional Economist
Latest posts by Unconventional Economist (see all)

Comments

  1. “green shoots” sorry but my staple reply is it is actually mould.

    How many times have they said recovery for ti to remain ‘flat’.

    I think it is just de-listing let’s say what happens in Spring.

    TM.

    • reusachtigeMEMBER

      The spruik of these housing sales spokespeople with their continual drone that the market is now about to pick up again, and again, and again is just as bad as the Macrobusiness memes that unemployment is just about to rise and interest rates must come down.

    • “Don’t try to turn a lemon into lemonade. Buy the right property at the start and you’re guaranteed to make a good return.”

      Deserving of the firing squad.

  2. TheRedEconomistMEMBER

    I enjoy the last bit of the RP Data report.

    Lawless talks about the cost of rentng and buying.

    He mentions the cost of minimum repayment on a loan of about $500K is $3.5K.

    He then mentions the cost of renting a similar property would be about $460 per week.

    He then states “Clearly Renting is a cheaper option based on these figures, but are you willing to pay more for the benefit of owing your own home.”

    I believe, many would be buyers (holdouts as they have been referred to in the MSM) understand this simple maths.

    Can anyone enlighten me to what benefits there are to owning your own home?

    Would it paying rates? maintenance? Wasting a weekend on a little home improvements? Eating local pigeons instead of chickens so the wife at mothers group can say we own our home?

    Someone please enlighten me?

    • I would suggest that 10-15% above value is an appropriate premium for home ownership. Well, its my personal threshold. Further, I don’t care about capital gains – literally. As long as the land and building together (And the latter will depreciate as a matter of fact) stay steady to purchasing power, who cares about capital gains? Housing is a consumption asset, not an investment for a home owner.

      Property investing and speculation as opposed to ownership is completely different: you should be buying at or below value, using a solid required rate of return (RRR). That is, inflation plus bond yield (or dividend yield) plus a market risk premium. The first two components are currently at only 5-6%, whereas the market risk premium for property – at least across the country – is well above 4% IMO – possibly above 6%. That gives a total RRR of 9-12% which is a heady discount rate when doing a valuation (and includes rental yield).

      I have a beta rent/buy calculator in the works, and when they perfect cloning technology I’ll finish it, but for renters, there’s more to it than just the valuation, there’s the servicing costs of the mortgage, maintenance, insurance, rates etc, and the opportunity costs with the use of your deposit and savings you have to weigh up as well as your psychological makeup.

      • My discount rate when looking at property investments is actually pretty similar:

        Cash rate (currently 5.51%)
        Less: Marginal tax rate (38.5%)
        Plus: Risk premium ~3% (which I think is actually pretty low)

        This gives aproduces discount rate of about 6.4%.

    • Two to three years ago there was nobody more bearish than me about Australian residential property, especially the Brisbane market.

      People may be familiar with my website homes4aussies (which I have now taken down as it was costing me $s to keep up) and my blogging here, on Steve Keen’s site, on Bubblepedia, and at periods intensely on News Ltd websites (aimed at alerting especially young Aussies to the bubble – at a time of extreme hype – and giving them some tools to work out what is best for them, including some papers on comparing costs of renting to buying).

      I was named in Phil Soos’ paper identifying those who identified the bubble, and walked with Steve Keen out of Canberra on the first of his treck.

      So nobody should doubt my “contrarian credentials”

      I remain strongly bearish about Melbourne (because of its recent bubble activity, so I have an expectation of mortgage stress and delinquency affecting that market going forward, and oversupply issues through government over stimulation).

      Throughout Australia I do not expect to see real house price growth for quite a number of years, so nobody needs to feel rushed in any way.

      But I am much less bearish these days, especially about Brisbane, and I actually bought my family’s first home 12 months ago – I believe that the “vendor’s boost” helped this market a lot, in that it’s timing coincided with the rise of mortgage stress, which typically occurs 3-6 years after a run up in prices, and so helped alleviate its affects, and because of the mining and capex investment boom in Queensland. Admittedly this was coloured by my family’s strategic move into the top speed component of the economy, with many people in my wife’s new place of employment – involved in CSG – looking to buy homes… and now this is obviously counter balanced by Chainsaw Newman’s austerity drive. But I still believe that the most likely direction for the Brisbane property market, and much of the rest of Australia, is pretty much to flatline in nominal pricing (so in 5 years time that will put Brissie at about a 30% real decline which is historic).

      So why did I buy? First and foremost, for me money is not the endgame, it is an enabler. For people who care most about the optimal allocation of capital, then buying is not for you right now, and perhaps it won’t be for a very long time.

      In my papers about the buy vs rent decision I spoke about emotional premium, and that is really what we are talking about here. For me, importantly at this time of my life (in my 40s with two kids), I decided that that emotional premium was fairly large. I saw little point in eventually owning a home if my family was not going to live in it and grow up in it. In this way, people who join the property ladder, intending to spend no more than a few years in a home, share more in common with those who elect to be life-long renters for purely financial reasons (as apposed to having no choice but to rent) – they just have different views on what is the optimal allocation of capital. What I also find funny is that many of those same people will flush thousands down the toilet each year in depreciation on new vehicles. In the end it’s just personal priorities.

      I would caution everybody about listening to one liners about not buying now, and about getting too comfortable in the herd – because the idea that prices are going to go nowhere for a long time, if not fall, is no longer the contrarian view. I think it is becoming the consensus view.

      And I would ask this – with prices in some markets down around 15-20 in real terms, with lots of stock on the market, thus the potential to buy from an urgent seller at 10% or more discount to current market pricing, why would you not be looking??? Is 30% plus real down from market peak not enough???

      Not only that, there is still some clear mispricing going on. People are still paying more for a slightly nicer home even if the slightly lesser home is sitting on a much bigger chunk of dirt. If you are buying for the very long term, you can expect that your large piece of land will eventually compensate for much (if not all) of any additional downward movement in pricing that you miss out on.

      And if you really want some insurance against Australia becoming the next Greece, well there are ways to take out that insurance.

      And it goes without saying that nobody without a very decent sized deposit should even be considering buying.

      This should not be taken as advice, just my 10 cents worth.

      I have to end by saying that my family is in love with our home. We have worked together in our big yard, planting trees, building a pizza oven, gardening, etc. If I had known what joy it would give us, I would have been prepared to pay an even bigger emotional premium. But that’s us…

      • Top comments. Similar to my experiences when we bought our house in Melbourne in 2006 – albeit before the latest price boom. I thought prices in my suburb (inner east) were expensive then, but I was sick of renting. But they are ridiculous now (my suburb is up about 40% since then), which is part of the reason why I am so bearish on Melbourne, along with the negative indicators.

        Bottom line: It’s horses for courses. Buy when you are ready and comfortable, but don’t feel pressured. Prices won’t run away anytime soon.

      • Well people in Brisbane and Melbourne probably can say this with conviction but unfortunately not to me and others looking to buy in Sydney, bloody Sydney. Well, I actually agree with your opinion about emotional premium but in SYD the current market premium is much more than I can rationally or irrationally take 😉

        Probably I can only take it if I am delusional.

        • TheRedEconomistMEMBER

          Agreed DEO…

          In my part of Sydney alot of new home purchasers are a broken fridge away from handing back the keys to the bank.

          But fear not…if you cannot afford the stamp duty …. they are more than happy for you to throw down the MAstercard and load up on some 10%+ debt for the privilege of keeping the state government solvent.

          • Well in my SYD North area, the main problem is high numbers of irrational, yet very rich new migrants mostly from China / other Asian countries who just bid-up the prices without reservation. Most of them are ex-international students who have super-rich parents in their home-countries and it is just unfair competition for normal people who work normally without support of rich parents. I and my wife actually earn good salaries as professionals and yet we cannot rationally buy in the area where we live in the last 10 years.

            The immigration policy of Australia is not trying to attract skilled professionals like me, but it attracted lots of rich migrants who actually do not need to work due to assets accummulated overseas.

      • Hi Brett,

        I wish you all the best and well understand your point re the emotional aspects of this matter.

        My family is in a similar boat, and finding the renting wearing at this point. The draw of having one’s own home has something about it which defies the cold hard logic of dollars and cents, for sure.

        Everyone has their own individual circumstances and,if that is your emotional makeup, you may well get more enjoyment from being able to put in the “emotional investment”, than you regret the potential loss in $$$.

        You say “why wouldn’t you be looking (now)?”, and if you managed to jag a property for a real 30% down from peak I’d say well done!

        Yet I would ask you where in Brisbane has fallen to the extent you mention? On the Coasts perhaps, but nowhere I can point to in the city. No info/graph I have seen in the last 3 years supports this sort of drop either. It is more like between 6 and 12%, depending on where you are looking. Perhaps 15 to 20% for some of the really high end stuff over $2M (unless you are talking previoulsy flooded which could be more). Some places haven’t yet come down much at all.

        I gently suggest that the temptation to rationalise a departure from a previously held view (particularly a publicly made one), is strong.

        Further, it is easy to slide around to another viewpoint (I’m much less bearish now), quite possibly subconsciously, when circumstances change so that that viewpoint is the easier one to hold. Less internal friction so to speak.

        Please don’t think I begrudge you your purchase. I truly hope it brings you much joy. But let us all try to maintain rigorous intellectual honesty, and notice when our views may be being colored with hope…in either direction.

        From Brissie too.

      • Some sound advice there. The whole apartment vs free-standing house thing is a debate that is long overdue in Australia.

  3. TheRedEconomistMEMBER

    Thanks Prince..

    “I would suggest that 10-15% above value is an appropriate premium for home ownership”

    Please explain in Lehmans terms or in numbers.

    With monthly rent currently just over 50% of minimum repayments on a loan when would you suggest it is beneficial to buy?

    • So many factors here isnt there?

      First – is that repayment figure predicated on the current standard or discount variable rate? What if it goes higher by 2 or 3%? (likely, but not higher than that I would suggest) Lower by 1 or 2% (I dont think we’ll see SVMR lower than 5% in Oz, but I could be wrong) But yeah, its a huge divergence isnt it? Even for undisciplined investors, if you even save half of that gap and invest in a TD or solid dividend paying stock, you’d be way out in front, at least in the medium term.

      Next – theres a difference between how much you can borrow and how much something is worth. I use imputed rent to value a house – i.e whats the cashflow I can get out of this asset?

      If I can rent out a house at $500 a week, or $23000 a year net income (assume 2 weeks rental vacancy, less rates, home insurance), and using a 9% RRR that gives a valuation of $256,000

      Add 2-3% for inflation (by reducing the RRR to 6 or 7%) and the valuation goes to $328,000 to $383,000

      Add 10-15% as your “homeowner” premium and the max price to bid to would be $441,000

      BTW, thats a gross yield of 5.6% on the $500 per week rental cashflow, or 5.2% net.

      And we wonder why houses are overvalued? Its because we value them on what people can borrow, not on what they are worth.

      Hope that helps – its only one of various valuation methods, and makes subjective assumptions -e.g if no inflation in house prices, suddenly you’re looking at a house only worth $255,000, not $441,000

  4. TheRedEconomistMEMBER

    Cheers… that is a very good summary.

    The rate I was using was a SVR of 6.81%. (Pre-approval from April) But I reckon with further discount I could get around 6%.

    In regards to my situation… My rent is $2K per month. It has not changed for nearly 4 years. I pay rent on time without fail and the place is in better condition than when I moved in. So hoping it does not increase

    Landlord refinanced and the bank put $570K on the house last year. Land value in the area is $500K+. House is original Weatherboard Cottage. Not Brick. Similar places are being picked up for low $600’s. To investor believe it or not.

    On top of paying rent, I am currently saving $2K per month and have this in a high interest saving account (5.35%) The account is in my wife’s name who works part time. (Marginal Tax rate is 15%).

    It gets up my goat though, that savers like myself, pay tax or interest, propping up specuvestors whom claim deductions to minimise the tax they pay.

  5. This would be the third flush of green shoots sprouting since the housing market drought first hit. The first two ended up being crop failures – maybe third time lucky?

  6. The property spruikers are doing one of two things: either they are lying through their teeth to distort the market or they actually believe their own drivel. I don’t know which is worse.

    Look out the window. The land and buildings you see are totally agnostic as to who owns them or the price they sell at. They lack the capacity to even shrug at mankind’s scheming.

    There is endless stock on the market and tentative discounting is having zero effect. I shake my head at the horrendous risk anyone geared into real estate is taking in these times.

    Don’t Buy Now!

  7. A few problems here… 1. People do not purchase based on rental yield and DCF’s 2. People do not purchase with 100% cash 3. The price is based on maximum loan service vs poverty lifestyle 4. We are not different. 5. Equity is not money

  8. When the biggest bear capitulates it says something….

    When the market consensus is to flat line it says something…..

    if you can tune into this frequency you know you have arrived!