London property earns more than Londoners

uk housing

By Chris Becker

It seems you can’t go wrong speculating on property, as capital gains in London – 19% for the year or £71,000 – are almost double the average post-tax income for Londoners!

A shocking chart from FT Alphaville tells the tale:

It’s even better in Sydney where house prices are up nearly 15% this year on a median around 680k:

ScreenHunter_2887 Jun. 12 16.18
That’s$100k per annum, much better than your average salary. Take the year off and let your dogbox earn the cash for you? What a plan!

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  1. GunnamattaMEMBER

    If you have a look at some of the links I slapped up on the weekend you will find the majority of the UK related one were about the IMF (or anyone really) warning about how dangerous UK property had become.

    Yesterdays Telegraph

    Then there is the BoE suggesting time is nigh

  2. LabrynthMEMBER

    What a terrible lesson this will teach young people…. Don’t educate or invest in yourself, leverage up and sit back.

    This country has the resources and the brain power to pioneer space exploration yet our smartest and brightest turn to the law profession because its the socially acceptable job for ‘smart’ people.

    No politician can change this culture while property prices are rising, change can only take place when the market burns. For the long term success of this nation its in our interest to push property prices up as high as possible to facilitate the much needed crash to bring on the reset to the economy.

    • Well that’s exactly what we were told as a 90s high schooler. Be an engineer or else you’ll live in a tent. When it should have been work the ladder at Target, leverage to the tits like a sicko sordid degenerate and retire at 40.

      But I guess I should just be dismissed as being “bitter”.

      Exactly, we need a crash and a depression and all of these specufestors need to be annihilated before you’ll get anyone wanting to do the hard stuff in any significant numbers.

    • I recall Australia had some quite important stuff going on at Woomera once.

      Also, back in the early 1940’s, Australia and Sweden had military aircraft manufacturing, both a little bit behind the most advanced stuff coming out of the major powers, but now, Sweden manages to still export fighter jets and a whole lot more military hardware (which is a very strong contributor to its economy).

      Where and why did the divergence come in?

  3. Property price gains should be included into income (it’s not much different than some other things ABS already includes: superannuation, imputed rent, … ).

    In that situation, average income in London gets to £100,000 and around $170,000 in Sydney. We are all getting rich and we don’t have to do anything to get there.

    “Lucky country”

  4. What the ____ am I doing?!?!! Near 3 years fighting a losing battle for SME survival against the AUD. Should of bought a house in Sydney instead. Life of bloody Riley.

    • You did it for the challenge; the application of your talents; the thrill of business; the cut and thrust of finance; the rewarding looks on your staffs’ faces when the company paid them each week; the thanks from your customers when you delivered on time and on price …..All you’d have done by being at home in your appreciating asset in Sydney is…exist. Life is short…..

      • migtronixMEMBER

        Life is short J. and no one has ever seen an infinite bubble (apparently), but which will out live which?

        The application of one’s talents are barely noticed or commented upon, a friend just bought a second IP don’t you know…

      • On this young person’s facebook feed, the guy taking a tentative starts to his own business saw nothing but snickering and denigration while another another’s photo out in front of their brand new mortgage was filled with congratulatory comments.

        I shit you not.

      • I find myself slipping into depression the more my friends get mortgages and investment properties (Gen Y). Their path to wealth is property investing, the perks of negative gearing and staying in the job long enough to get long service leave.

        Where are the young entrepreneurs who want to achieve something and make the world a better place? They’ve been inducted into the great Australian property investment cult.

      • Permacuppa… The young entrepreneurs have left Oz. At this point, everyone knows that trying to get ahead in Oz by productive enterprise is a mug’s game.

        London house prices will probably be kept alive by finance and rich foreigners – I have seen London housing compared to the art market. This factor may help Sydney maintain its prices too. The rest of Australia however is in economic LA LA land, and Australians collectively deserve to lie in the bed they have made.

        Australia: the nation that is now internationally uncompetitive at everything except digging up dirt.

  5. “Take the year off and let your dogbox earn the cash for you”. Jokes aside, over the past 5 years Macrobusiness really misread the tea leaves on the Australian property market. I suspect you guys will be proved right over a longer timeframe however.

    • migtronixMEMBER

      I could have sworn property was topping xmas 03 (Perth) when I came back for a visit! Returned in 09 and couldn’t believe what I was seeing, took me 4 weeks to find a place to rent in Melbourne then. Thought the top was in for sure…

      • Mining BoganMEMBER

        Everybody has been caught by surprise with the effort that governments, and their evil banking cronies, have put into promoting the bubble.

        BUT…I stayed out of this nonsense yet am one of the few that I work amongst that can afford to walk away from a job. There’s a very important lesson in that.

      • Spot on, Mining Bogan.

        In 2008, two colleagues (in England) in their 30s had to move back in with their parents when they couldn’t get their mortgages refinanced because they still owed between 110-130% of the post-GFC value of their homes. For one bloke, this meant moving back to Nth Ireland and the a retracing of his career.

        After seeing that, since returning from the UK 3 years ago we’ve rented rather than carry the risk of buying property in a bubble. As such, we’ve also had no problems with my wife making the change to stay-at-home mum. Our quality of life has been much better for it.

      • innocent bystanderMEMBER

        yep. ever notice how prospective employers subtlely check out your dependents? kids, mortgage? Makes for a much more compliant employee; especially in management where they want you to kick heads.

      • Mining BoganMEMBER

        Innocent, I had some discussions with HR recently about reducing my role and therefore my hours. They’re surprised that I’m chasing it at my age.

        When I told them that they need me more than I need them, they thought I was joking. Once they worked out that I was serious it was like they took offence at it. They NEED to think they’re in control. They NEED debt slaves to push around.

        The one thing these people hate is not holding the superior hand.

      • Mining BoganMEMBER

        Ha! I’d forgotten that column.

        Greed and excess. I’ve banged on about that from day one. Greed and excess. Terrible things they are.

      • @StatSailor – And don’t forget poor Tony who did exactly what he is now telling us that the country can’t do when his income dropped after the Howard Government lost power.

        Borrowing not for investment, but just for consumption. Imagine that!

        It was obviously back in the days when his family had to actually pay for their education.

        [Tony Abbott] is no stranger to a thumping home loan and a bit of financial pressure. When he lost his job as a Howard government minister after the 2007 election defeat, losing about $90,000 in salary, he took a new $710,000 mortgage on his house in Forestville to cover his costs of living and the private school fees for two of his three daughters.

      • J BauerMEMBER

        AB, at least Tony has found a way to reduce the burden of school fees for his kids…

      • Innocent Bystander,

        Anecdotal of course but when I was at a job interview in Sydney CBD in 2010 I was asked if I had a mortgage. After I told them no the managing partner replied “Shame. Makes for a more focused employee”. That is the only thing I remember about that interview.

      • “AB, at least Tony has found a way to reduce the burden of school fees for his kids…”

        Unfortunately we’re all going to pay for it if his plan to allow public funding for private education providers goes ahead.

        But he’s the “what’s in it for me PM” so that’s not really a surprise.

    • I don’t think that’s correct. The lean has been to a slow melt by the guys but the discussion has been along the lines that central banks are definitely chasing asset and housing reflation.

    • I have been reading stuff recently on the economic cycle that is starting to persuade me that somehow the house price median multiple and even the level of mortgage debt built up is not a predictor of the timing of the crash at all. The length of the cycle seems to somehow defy those things.

      Ireland’s crash came “when it was due”, not because its median multiples had gone far too high – they were nowhere near as high as Aussie’s now. Also, Ireland’s crash, and the USA’s, and Spain’s, took the government and central banks by surprise.

      Australia, I now think, had its “crash” in around 2008, but the powers that be managed to make it a weak one. I think one crucial factor is whether “mania” sets in on the down side – if you can avert that and pump in stimulus and keep everyone happy, you can make the bottom a high one.

      I still think the Ludwig Von Mises thesis holds, that endlessly stimulating via money supply to avert the consequences of the last crash, will ultimately result in the total breakdown of the fiat money system. But going by economic cycle theory, I am with considerable horror thinking of the possibility that the next crash in house prices that many of us are waiting for, won’t be till 2024 – 2026.

      I realise this is a lot different to what I have said before, and this now leaves me with a long time to wait to see if I am right. I think it will be VERY difficult meanwhile to keep our nerve about not loading up with massive debt to “get on the ladder” – the prices are far too high and renting is the sensible option even if you don’t buy till after 2026. You stand to save quite a lot of money.

      If they don’t crash by or during 2026, then something magical really has been done to the whole system. But the effect on the young does mean that they need to wake up and revolt. What really bothers me is that waiting and waiting and waiting for a crash that takes years to come, will lead to more and more young people (and not so young) giving up and joining the ranks of the hostages to the racket – making 2024-2026 as bad as it possibly could be. Not to mention the specufestors regarding their “new normal” thesis as completely vindicated after that long a time of the “doomsayers” being wrong. Imagine how much debt there might be to be wiped out…….

  6. Relax. Most property buyers are “buy and hold” types, and there is no reason to use just the last 12 months as your frame of reference.

    Average returns on property in Australia over the last 10 years are of the order of 1.9%. I would imagine a large number of property investors would be underwater over that time frame, considering interest costs, maintenance, rental yield, vacancies, property management fees blah blah blah.

    Over the last 10 years you would have been better off with a term deposit.

    • Owner occupiers perhaps.
      Less sure about “investors”. I’ve had a few landlords who sold after 1 or 2 years of owning the property (possibly realising that property investment wasn’t passive enough for their lifestyle).

      Does (or possibly post-Budget did) anyone keep statistics on the median time investors hold properties?

    • Relax. Most property buyers are “buy and hold” types, and there is no reason to use just the last 12 months as your frame of reference.

      Sorry but this doesn’t hold water. In Australia there are 1.2 million property investors out there, and 2/3 of investor financing is interest-only. It’s a specufestor’s paradise out there.

    • @retnuhb

      I would have thought the 1.9% return was AFTER all those costs you mentioned are factored in – if not, why can’t i rent a million dollar property for $19,000pa?

      In any case, specufestors are not ‘investing’ for yield, they are going for capital growth.

      • “…why can’t i rent a million dollar property for $19,000pa? ”

        I bought a house in Melbourne just over a year ago but before that I was renting a $2 million dollar house (5 bedroom / 1000sqm / inner-East Melbourne) for $600 per week.

        600 * 52 / 2000000 * 100 = 1.56%

        So maybe you can’t (or couldn’t, though I find it hard to believe yields have gone up since) get a one million dollar property for that price, but you certainly can/could get a two million dollar rental for less than double that.

      • AB – what’s your old real estate agent’s number? I want to rent that house! Fair dinkum, I thought I had one of the best bargains in inner-east Melb (huge 1930’s-style 2bedder in one of Hawthorn’s best streets for $430 a week) but your old place blows that out of the water.

    • “Average returns on property in Australia over the last 10 years are of the order of 1.9%.”

      Are you able to quote a reliable data source?

      • Some very simple numbers.

        According to the ABS all dwelling index, between March 2004 and march 2014. the index has increased from 71.3 to 114.3.[email protected]/DetailsPage/6416.0Mar%202014?OpenDocument
        Thats a CAGR of 4.83%
        Add average yield of 4.0% (yields were low in 2004, but rents are up 60% since) then you are looking at a total un-levered return of 8.8%

        Assuming round costs (Stamp & selling fees etc) are 5%, then this knocks 0.5% from the per annual return over ten years.

        Knock another 0.5% per annum for general maintenance ($2-3k per annum for the median dwelling, then un-levered returns have been 7.8%.

        Average mortgage rates have been 6.5% over the past ten years (SVR – 50/75bpts).

        So assuming 80% LVR, the return on equity over ten years for the average property has been 13.0% per annum (7.8% – 6.5%*.8)/(.2) before taxes etc.

        For an owner occupier, all of these numbers are post tax. So a 13% per annum ROE is equal to 21.6% per annum pre-tax equivalent for 40% tax payer. 24.3% for the highest marginal tax payer.

        I have excluded any first home buyer grants or from the analysis.

        It has been very costly to be bearish on property over the past ten years.

      • It has @b_b, very.

        Saving up a decent deposit is the stupidest thing I have ever done, financially speaking.

  7. Anyone flipping investment property in Australia after 1-2 years is delusional. Transaction costs are much too high (stamp duty on purchase, real estate agents commission/advertising/property presentation/conveyancing +CGT) to make this profitable. Usually when people talk about “profits” they have made on short term property transactions, they ignore all these transaction costs which can be in the range of 8-10% of the value of the property.

    • Mining BoganMEMBER

      Yep, it’s like those big pokie winners. You never hear about how much they pump through the machines.

    • Not delusional. Just didn’t foresee the future/ do their homework. Didn’t have the cash flow for mandatory repairs or needed to access the capital to upgrade family home.

      Thought they were long term, but circumstances changed.

    • This is a good point. Early entrants were winners but the only real winners now are the usury industry and the politico housing complex.

      Those paper gains don’t easily convert to real profits.

      • Dead right. I purchased an IP in Preston some years ago for $295K. Sold it for $395 K 4 years later. Sounds pretty good on paper = 34% gain ?. Deducting all the transaction costs, CGT, negative gearing expenses, property maintenance, my net profit was $35K. The real return on that deal was therefore a crappy 2.8% pa over 4 years. Not worth the headache.

    • Hence why I lament the lack of derivatives for the property market.

      Instead, buying banks (hedged of course) and other financials (and diversifed consumer stocks) as the RBA cut rates – lagging the RBNZ which gave the macro clues to what was about to happen (plus a very nice macro/technical model I built during MI) many (hello Becker Super) were able to profit well out of this rally in house prices without all the associated transaction costs.

      • Well that is a very good point. I’m interested in your comment – RBA lagging the RBNZ. Do you think that still applies ? If yes, do you think will we get macroprudential controls? If yes, what will that do to equities in financials ?

      • RBA lagging RBNZ?

        Yes, the RBA has shown itself to be the laggard of the central bank club in more ways the one, as explained here at MB.

        I’m pointing to the straight technical/price momentum of the housing markets in NZ and Australia. The former moved first after the RBNZ slashed rates aggressively and were too slow to enact MP (although it has worked, too late) or raise rates.

        Also the NZ50 stock market and the AUDNZD plus some other inputs into my models plus the undenialable speculative nature of the Aussie housing market gave the signals to go long housing…

        As for what will/could happen? Do I think the RBA will raise rates?

        They just might, especially if the permahawk shills get their beaks into them, but I think next years capex cliff will weigh too much.

        For now they are likely to hold, but anything can happen.

        No on MP controls – they dont have the guts to do it.

        Financials? I dont know is my stock answer. Again, NZ plays a part in divining a future.

        But as someone beautifully pointed out earlier today, I’m shite at forecasts – my investing and trading style is to trade breakouts. i.e react to what is happening – which means I’m always late.

        I dont care about that. I dont care about getting it “right”. I care about making money, nothing else. Cut your losses, change your mind, move the frack on to the next opportunity.

        No whining, no fuss no muss.

        But to get to that stage, you have to build mental models and what you think could happen – and thats how I saw what has happened in Sydney et al with this latest boom.

        EDIT: what Ive just said comes across as pompous wankery – I apologise for my forcefulness, but there it is. I love my job and I’m passionate about making money.

  8. Greconomics. Look at the following data source (derived from ABS data), first chart:
    Go to 2004. Index value is around 330. Now go to 2014. Index value is about 400. Over 10 years that equals 1.9% pa capital growth.
    If you think of Sydney for example, yes there has been spectacular capital growth over the last 18-24 months. However in the 8 years before that – very very little.


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