21 February 2011

Too many houses under construction?

| johnboy
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The ABC has the happy news that so many houses are under construction at the moment there’s a possibility prices could come down.

To avoid the horror of housing affordability BIS Shrapnel are recommending builders slow down to manipulate the market.

At least they’re being honest about it one supposes.

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georgesgenitals4:22 pm 23 Feb 11

urchin said :

hi george,

yes i reckon we will agree to disagree in the end.

No problem, and thanks for your sensible response.

urchin said :

The only conclusion i can reach is that you believe that your properties really will appreciate substantially in value (though most others will decrease). that’s fine, but it seems odd to expect that the larger market trend will leave your properties untouched.

Although your numbers make sense, it’s an individual’s situation that complicates things.

First, I expect my properties to outperform the market. I’ve chosen them for exactly this purpose, and also paid significantly under market price for some of them (even compared to similar properties at the time of purchase), resulting in gains right from the start (and yes, there’s further complexity as to how this can be done). Whilst I think the market will stagnate by around 30% across the next 8 years, I don’t expect my properties to do the same. I expect them to hold their value or to change in real value by only a small amount. This brings me to my second point.

Second, I am able to increase both value and rent through carefully thought out renovation. For example, I have just finished doing a renovation (none of it myself, all using a builder) for about $14k, that has directly resulted in an increase in rent of $70 per week. The reno took 3 weeks and new tenants are signed up. That’s a return of 26%p.a. on that $14k, and an increase of value in the underlying property also. I’ve done this several times before, and have another couple of properties where I think this will work well.

The overall plan is to get some modest gains over the next 10 years, but to be in a position to take advantage of the boom that will eventually follow. I’ve thought and read a lot about the other factors I mentioned in my previous post, and I don’t see a great deal of change ocurring, except for the possibility of credit becoming harder to obtain (although I don’t think it will be much more expensive than now). It’s worth noting that property is usually only in ‘growth’ phase for a third or less of the property cycle, and the property doesn’t necessarily operate on a fixed timeframe.

In the next upswing following the current stagnation, I would expect property to rise by around 100%. This would mean that property has doubled in price (on average, remember) between now and perhaps 2025 – an average of just under 5% per year. This is of course a guess – it could be anywhere from 50% to hundreds of percent. But my situation means than even a 50% gain in the next 15 years will directly result in a couple of million dollars return, and I don’t have to pay while I wait.

I’m not for a second investing successfully in property is easy – it’s not. It requires lots of thought and management of risk. But I believe it’s possible.

hi george,

yes i reckon we will agree to disagree in the end.

i am a bit skeptical of your argument that increased supplies will drive up prices (just as, presumably, constrained supply will also drive up prices). Nor do I think that the canberra labour market is as insulated as you suggest. in 07-08 kevin’s awkward rhetoric of “taking a blowtorch to the shaky sauce bottle” of PS was enough to put a chill on the canberra housing market. we are extremely vulnerable as so much of our population is directly or indirectly dependent on one employer.

i am still puzzled as to why one would hold an investment that one thinks will underperform inflation for the next 8 years to the tune of 30%. yes, the rent and neg. gearing benefits might be paying the mortgage, but you’re still moving backwards all the same.

let’s run some numbers.

Lets assume:
1. your total portfolio is worth 1 million (round numbers are easy)
2. your share of that is 20% or 200k (the amount you actually put into it).

The idea is that houses underperform inflation to the tune of 30% over 8 years (taking the most gradual of the scenarios you posit)

If we assume 4% inflation (less than that would mean nominal and real declines in prices) then houses will appreciate an average of 0.75% per year over 8 years.

i.e., if i’ve done my maths right (probably not)

in 2019 ~$1.37 million will have the same purchasing power as a million today.
in 2019 your property portfolio will be worth $1.06 million (give or take). if you sell in 2019 you will receive 60,000 dollars above what you would receive today. Subtract cap gains of ~15% and you walk away with $51k.

That’s assuming that your rents cover the mortgage payments. the figure might increase somewhat as you’re paying off principal and interest. so let’s boost it another 29k to $80,000

Now, as an alternative, let’s say you put that 200k into a 6.5% deposit account. We’ll knock off ~1.5% for taxes for post-tax of 5% interest. Assuming interest compounded daily, that will give you around 298k at the end of 8 years.

so by doing absolutely nothing other than sticking the money in a deposit account, you come out 20% ahead of investing in houses.

if you really believe that this is the situation for the next 8 years why invest in property? the numbers don’t add up. sure, rents will increase a bit but if housing is stagnant and there is so much supply coming onto the market what will be the impetus for increased rents?

it seems like a lot of risk for a sub-par return.

The only conclusion i can reach is that you believe that your properties really will appreciate substantially in value (though most others will decrease). that’s fine, but it seems odd to expect that the larger market trend will leave your properties untouched.

georgesgenitals12:17 pm 23 Feb 11

Hey Urchin – you made a couple of comments that are directed at my posts, so let’s tackle them one at a time:

1) If I’m calmly predicting 30% falls, why aren’t I selling up?

I’m not selling because my property portfolio (overall) is not negatively geared, and is performing as I expected it to. I didn’t buy my properties all in the last 12 months, but over a number of years, and as such the portfolio is cashflow positive, and becoming more cashflow positive as time goes by. I have some properties that generate significantly more $$ than their holding costs, and some that are pretty close to neutral cashflow. What this means is that my property portfolio costs me nothing to hold on. I can literally sit back and wait for the next upswing, which I think is probably 7 or 8 years away. Also, why would I want to incur and pay Capital Gains Tax on assets which, from a long term perspective, are performing within their expected targets given the amount of risk involved? My plan has always been to accumulate and hold, and to gradually pay down the loans (which I do consistently). Over time, the holding costs get smaller and smaller (don’t forget that regardless of current value, I’m paying back a loan on values from years earlier). For many investors (including me) property is just one aspect of a larger strategy.

That said, those property investors who subscribe to the old, buy, hold for 7 years, sell rule won’t do so well if buying in now.

2) Glut of housing – 17000 lots.

First, where do we think all the builders will come from? The labourers? Suppliers of all the extra building materials? Eventually, of course, it will all get done, but the process will take years. Tradies are all flat out as it is. Of course, we can bring in more builders and tradies, who will then need shops, schools, roads, houses, entertainment, etc, and this will add to the local economy.

Second, as a property investor, I don’t own any property in outer suburbs. For my plan, it just doesn’t make sense. For others it may. If we do end up building heaps more properties in the outer suburbs that’s a dream come true for me, because I will then have a larger population desiring my (very) inner city rentals, and both values and rents will be pushed upward. Look at what’s happened with Sydney’s urban sprawl for clues here.

3) Employment.

Local and state governments are the main recipients of property related income. The feds get our income taxes and excise, and they pass on our GST. At the moment, there’s little real incentive for government to cut the federal public service back. Consider also what happened with Gershon – contractors got cut back, and lots of them left town. Now you have federal projects on hold, because they simply can’t get the staff. We actually have a fairly serious skills shortage here! Consider too what happened when the feds went through the public service and culled lots of jobs during the 1990s. Remember what happened to the ACT property market? It sagged and basically stagnated for nearly a decade.

I suspect we won’t agree on some or all of these points, and that’s ok. I’ve been watching and reading closely on this for some years now, and my opinion is simply that we are due for a market correction, but high incomes (relative to the rest of Australia), consistent employment and slow land release are all stopping prices from crashing. You also have other factors (eg disposable income increases, two parents working, larger houses, cheaper credit, etc) stopping prices from dropping rapidly. Of course, I could be wrong and if so I’ll wear the consequences.

But it seems to me that having a multi million dollar property portfolio that pays me money while I wait for future growth is not such a bad thing.

georgesgenitals said :

Chop71 said :

pfff, as if.
I still see shop signs wanting staff, construction sites with cheap overseas workers.
The Ghetto will eventually house the new workforce revolution of Canberra.
If you build it, they will come.

We’re in no immediate danger of having an oversupply of housing in Canberra. It will take years to catch up to demand. Throw in the most reliable incomes in the country, and we’re unlikely to see any major drops in the short term.

maybe you missed the bit in the original article about 17000 lots coming onto the market and the huge flood of properties in gunghalin? i think we are a lot closer than you think. building has been outpacing pop growth for several years already.

as far as employment security goes, i think you need to consider this more carefully. if there is an extended decline in housing the biggest loser (after construction companies) will be local and federal governments. they have grown excessively dependent upon real estate as a source of funds. if RE declines, the gov’t will go into cost-cutting mode and you can bet your bippy that the PS will be on the chopping block. it will be a double whammy for canberra, made all the worse because people blissfully leveraged themselves to the hilt thinking they had jobs for life.

wildturkeycanoe said :

Urchin – Rentals in my neighbourhood are presently around $400/week+ for small 3 bed on small block of land under 12 months old. I pay just over $500/week for my mortgage. Sure, there’s rates [another $1000/year], but for a new home you won’t be needing any maintenance money. Renters also have to put up with annual inspections, the possibility that the house may be sold from under them and keeping the place immaculate. At least I can let my yard turn into a jungle if I want, or pin photo frames to any wall with nails or sticky tape. Location dictates how much you pay – yes inner north might be a bit different but you can buy cheap from the new fringe developments.
By the way, I didn’t buy 10 years ago [else I’d have 3 houses by now] but only 12 months ago without any deposit [thanks Kev07]. It wasn’t that difficult but now the opportunity has gone for most.

it may be that in certain areas of canberra rent/buy differentials are not as large as in others. in other parts of the town, however, rent is so much cheaper than buying the only real incentive to buy is the expectation that prices will continue their astronomical climb. and *that* is speculation. And not very clever speculation given the high multiple of price/income and the fact that we will likely have a housing glut soon enough.

for some people it might be worth double their rent and the loss of financial freedom to tack stuff to their walls (my landlord lets me anyway), to not have endure inspections (I haven’t had one in 2 years) and to let their house and yard go to ruin (not my preferred approach in any case), but it seems like an awfully big price to pay for privileges of dubious value. Getting the boot because the house is being sold etc. is a real inconvenience but, on the other hand, it is a great incentive for getting rid of all the crap that one inevitably accumulates over the years.

the elephant in the room is negatively geared property investors who can’t afford to see a flat market. it’s a losing venture for them if prices are not constantly growing at a healthy rate. if they start to fear an extended plateau or decline we will see a mad rush to the exit when all these over-leveraged investors try to protect what is left of their retirement fund. at present most aussies are still in the “we are different” and “house prices never fall” mindset. but how long will this last when property investors are calmly predicting 30% falls in real terms (which makes one wonder why he isn’t selling up….)?

georgesgenitals10:45 am 23 Feb 11

allyroger said :

Housing IMHO is overvalued by 30% in the ACT, at some point theresurely is a tipping point and it will all come tumbling down. A correction is required.

I tend to agree. A couple of things to watch out for, though:
1) “Tumbling down” is more likely to take years than months, and will likely be achieved through prices stagnating and/or dropping slightly while everything else creeps forward. 5-8 years should do nicely.
2) Don’t expect any correction to be applied evenly across the market. Although the average may be 30%, that will likely be made up of a range of drops across various property types and locations. I’d expect the outer suburbs to do badly, and some of the real top end stuff can drop off also. Well located properties priced at or around suburb median won’t drop off much, I reckon.

I guess we have to wait and see. Regardless of our analysis, no-one has a crystal ball!

wildturkeycanoe6:10 am 23 Feb 11

Urchin – Rentals in my neighbourhood are presently around $400/week+ for small 3 bed on small block of land under 12 months old. I pay just over $500/week for my mortgage. Sure, there’s rates [another $1000/year], but for a new home you won’t be needing any maintenance money. Renters also have to put up with annual inspections, the possibility that the house may be sold from under them and keeping the place immaculate. At least I can let my yard turn into a jungle if I want, or pin photo frames to any wall with nails or sticky tape. Location dictates how much you pay – yes inner north might be a bit different but you can buy cheap from the new fringe developments.
By the way, I didn’t buy 10 years ago [else I’d have 3 houses by now] but only 12 months ago without any deposit [thanks Kev07]. It wasn’t that difficult but now the opportunity has gone for most.

georgesgenitals10:44 pm 22 Feb 11

Chop71 said :

pfff, as if.
I still see shop signs wanting staff, construction sites with cheap overseas workers.
The Ghetto will eventually house the new workforce revolution of Canberra.
If you build it, they will come.

We’re in no immediate danger of having an oversupply of housing in Canberra. It will take years to catch up to demand. Throw in the most reliable incomes in the country, and we’re unlikely to see any major drops in the short term.

pfff, as if.
I still see shop signs wanting staff, construction sites with cheap overseas workers.
The Ghetto will eventually house the new workforce revolution of Canberra.
If you build it, they will come.

arescarti42 said :

dvaey said :

arescarti42 said :

Clown Killer said :

I just love how people get off perpetuating the myth that hosing is somehow more unaffordable now that at any other time in the past.

I just hate it how people make unsubstantiated claims that housing unaffordability is a myth. The fact of the matter is that in the last decade, despite falling interest rates, increases in house prices have been so great that the average loan repayment now takes up 50% of the average wage compared to sub 34% for the 25 years preceding the year 2000.

I think what you just described there is also known as the sub-prime mortgage problem, which was caused by people buying way out of their budget because they were able to get cheap finance, then when they actually realise how much they have to pay, they start to complain. If you work at maccas, dont get a mortgage to buy a house in O’malley.

Spot on, cheap finance is probably the biggest driver of house prices. It is not that people are actually considerably wealthier or have considerably higher wages than 10 or 20 years ago, just that they only need a 3% deposit and interest rates are comparatively lower.

A recent survey of 1000 first home buyers who bought a home in the last two years (when rates were rock bottom and the first home buyers grant was in place) found that 10% were currently selling, 6% said they would sell if rates increased by 1%, and another 14% said they would sell if rates increased by 1.5%. Anyone who can’t cope with a mere 1.5% increase in rates should never have been a home loan in the first place in my opinion.

Sorry but I don’t really regard it as cheap finance, especially compared to other countries standard mortgage of 30 years fixed. The driver of house prices in Canberra is supply and demand.

To get a standard, small 15-30 year old 3 bed 1 bath in Canberra is $450-500k in the outer suburbs. they are not great quality, small and need work. How is that affordable for the first time buyer? Its not good value. In order for me at the bottom of the rung to move up, I need someone to pay that so I can pay $600 to 650 in a better location for 4 bed 2 bath new, modern house.

Housing IMHO is overvalued by 30% in the ACT, at some point theresurely is a tipping point and it will all come tumbling down. A correction is required.

dvaey said :

arescarti42 said :

Clown Killer said :

I just love how people get off perpetuating the myth that hosing is somehow more unaffordable now that at any other time in the past.

I just hate it how people make unsubstantiated claims that housing unaffordability is a myth. The fact of the matter is that in the last decade, despite falling interest rates, increases in house prices have been so great that the average loan repayment now takes up 50% of the average wage compared to sub 34% for the 25 years preceding the year 2000.

I think what you just described there is also known as the sub-prime mortgage problem, which was caused by people buying way out of their budget because they were able to get cheap finance, then when they actually realise how much they have to pay, they start to complain. If you work at maccas, dont get a mortgage to buy a house in O’malley.

Spot on, cheap finance is probably the biggest driver of house prices. It is not that people are actually considerably wealthier or have considerably higher wages than 10 or 20 years ago, just that they only need a 3% deposit and interest rates are comparatively lower.

A recent survey of 1000 first home buyers who bought a home in the last two years (when rates were rock bottom and the first home buyers grant was in place) found that 10% were currently selling, 6% said they would sell if rates increased by 1%, and another 14% said they would sell if rates increased by 1.5%. Anyone who can’t cope with a mere 1.5% increase in rates should never have been a home loan in the first place in my opinion.

dvaey said :

I think what you just described there is also known as the sub-prime mortgage problem, which was caused by people buying way out of their budget because they were able to get cheap finance, then when they actually realise how much they have to pay, they start to complain.

Sadly, while this may have been one of the largest drivers of the increase in housing prices, the simple fact is that prices went up because of it. So idiots like me, who wanted to own a house were in a position where they could buy a house which similar in size to what my parents bought in the early eighties. Back then it cost my dad, on a senior sailors wage, about four times his yearly income. The same type house now (although 30 years older), cost me about six or seven times my yearly income, on a mid level public service wage (which is still a little better then a senior sailor gets these days, unless they are getting sea pay tax free because they are cruising in the gulf).

arescarti42 said :

Clown Killer said :

I just love how people get off perpetuating the myth that hosing is somehow more unaffordable now that at any other time in the past.

I just hate it how people make unsubstantiated claims that housing unaffordability is a myth. The fact of the matter is that in the last decade, despite falling interest rates, increases in house prices have been so great that the average loan repayment now takes up 50% of the average wage compared to sub 34% for the 25 years preceding the year 2000.

I think what you just described there is also known as the sub-prime mortgage problem, which was caused by people buying way out of their budget because they were able to get cheap finance, then when they actually realise how much they have to pay, they start to complain. If you work at maccas, dont get a mortgage to buy a house in O’malley.

Im pretty sure that you’ll find that credit card debt/repayments are significantly higher now than 20 years ago too, and once again its entirely due to people spending above their budget.

For me the whole system is just the wrong way round. Neg gearing inflates the market and gives tax breaks to those who least need it. Mortgage interest should be tax deductible on your primary home and neg gearing should be abolished.

wildturkeycanoe said :

urchin said :

(*calculated on the difference between rent and purchase price. as expensive as rents are, it is still much cheaper to rent in canberra than to buy.)

Just check the rentals presently – 3 bedrooms going from $350-$500/week, 4 bedrooms $450-$600/week. You can buy a brand new house for about $100/week more more than this.
Downturn/upturn, it’s all speculation. Who knew 10 years ago prices would be almost 3 times what they were then? I’m just glad I’ve got my[the bank’s] little piece of heaven instead of giving half my pay to someone else’ 3rd mortgage.

are you comparing apples to apples or apples to avocados?

ex-guvvy 3 bedders in the inner north rent for ~500/week +/-. they would probably sell for 650-700k today. We’ll take the lower number. assuming a 20% deposit of 130k that leaves you with a mortgage of 520k @ 7% for 30 years= $800/week. but let’s not forget the things that renters don’t have to pay for. Rates, water connection fees, insurance, and repairs. that’s got to add about $50/week (esp. if its an older house that will need regular maintenance). so it’s $500 per week to rent or $850/week to buy. But wait, that 130,000 you put down as a deposit was earning 6.1% in a savings account. that’s about $8000 per year. sure, take a bit off for taxes and knock it down to 6000. that’s still $115/week. you can deduct that from my rent, which is now effectively $385/year. now if one knew one wasn’t going to buy in the short term that money could go into higher earning investments such as shares. but 6.1% (more if you have ubank) is not too bad.

so i have the option of renting at $385 or buying the same/equivalent house for $850.

if you are not expecting massive appreciation in house prices why would you be willing to pay 2.2 times your effective rent? same house, same location. sure, i can dig up the yard and repaint the bedrooms if own it. but that privilege isn’t worth $500/week to me.

lucky you for getting in 10 years ago. buying was a good option then–even 4-5 years ago. these days, though, the numbers don’t add up.

wildturkeycanoe6:15 am 22 Feb 11

urchin said :

(*calculated on the difference between rent and purchase price. as expensive as rents are, it is still much cheaper to rent in canberra than to buy.)

Just check the rentals presently – 3 bedrooms going from $350-$500/week, 4 bedrooms $450-$600/week. You can buy a brand new house for about $100/week more more than this.
Downturn/upturn, it’s all speculation. Who knew 10 years ago prices would be almost 3 times what they were then? I’m just glad I’ve got my[the bank’s] little piece of heaven instead of giving half my pay to someone else’ 3rd mortgage.

Clown Killer said :

I just love how people get off perpetuating the myth that hosing is somehow more unaffordable now that at any other time in the past.

I just hate it how people make unsubstantiated claims that housing unaffordability is a myth. The fact of the matter is that in the last decade, despite falling interest rates, increases in house prices have been so great that the average loan repayment now takes up 50% of the average wage compared to sub 34% for the 25 years preceding the year 2000.

As if that wasn’t enough, the ratio of house prices to wages has increased from approximately 3:1 to 8:1 between 1986 and 2010, and 9 of the 20 most unaffordable cities in the anglosphere as reported by demographia, are Australian.

Clown Killer said :

And as for bleating on about negative gearing – give it a break. You’d be more honest to trot out the old communist mantra of “All property is theft” than to bang on about the tax concerns of legitimate investors and businesses.

Well you explain to me how subsidising people who choose to buy loss making investments at a cost to the Australian government of multiple billions of dollars per years is legitimate.

There is “a possibility” that prices could come down? This is already a reality.

It is a similar story in the other state capitals. Nominal property prices started declining late last year, the real question is how long this will continue for, and how great the falls will be.

Although there is always the possibility that the Federal Government might pull something out of its ass in an attempt to reverse the trend like they did in 08-09.

georgesgenitals9:47 pm 21 Feb 11

bigred said :

Property investment in the ACT is a mug’s game. With high costs both government taxes and tradies, and rents being relatively low against the amount of capital tied up I can see very few pluses aside from the year 1 tax deduction for stamp duty.

It depends entirely where, when and what you buy. At the moment there aren’t many properties in ACT that I would consider investable. Of course, this will almost certainly change at some point in the future. It’s important to understand where in the market cycle you are, and to make realistic assumptions about future performance.

Clown Killer9:39 pm 21 Feb 11

I just love how people get off perpetuating the myth that hosing is somehow more unaffordable now that at any other time in the past … I guess it’s the prerogative of those new to the market – who wake up one morning and decide they want to buy a home.

Here’s a tip. The rest of the world saved hard and made sacrifices in order to scrape together the money for a home of their own – that isn’t gonging to change any time soon.

And as for bleating on about negative gearing – give it a break. You’d be more honest to trot out the old communist mantra of “All property is theft” than to bang on about the tax concerns of legitimate investors and businesses.

Property investment in the ACT is a mug’s game. With high costs both government taxes and tradies, and rents being relatively low against the amount of capital tied up I can see very few pluses aside from the year 1 tax deduction for stamp duty.

georgesgenitals7:07 pm 21 Feb 11

As a property investor with a number of properties in Canberra, I fully expect for prices to stagnate over the next 5-8 years. During this time I expect the market average price to drop in real terms (rather than nominal values) by around 30%. I reckon we have another year or two of rent rises first though. I don’t think we will see significant short term price drops in highly sought after areas, though (we may even see some more gains). Out in the mortgage belt, though, it’s definitely possible.

It’s completely normal for prices to rise for a while then stagnate or even drop for a while. Property investors with a long term strategy know this, and factor it in to their planning. I’ve been buying property for the last 7 years, not to make short term gains for now, but to get ready for the boom AFTER the stagnation which is now coming. My rents mean my properties are positively geared, and I can still add value through strategic renovations when it suits me.

For those desperate to buy into the market, I’d be out searching for bargains in the outer suburbs. Look for ads on AllHomes that have been around for a while. Don’t forget than buying a property with problems and then carefully renovating can work out better (much better if you know what you’re doing) than buying a property that’s perfect to start with. Don’t be afraid to put in lots of offers, and to ‘lowball’ when it seems the seller is motivated.

oh the horror – prices might come down, rents may drop. could it be that, against all expectations, the run of double digit annual inflation in house prices might be coming to an end? what a tragedy that would be.

canberra housing is, like all major aussie housing markets, poised on the edge of a cliff. the *only* economic reason to buy in canberra is because you think prices will continue to go up.* this has been the only reason to buy for several years. this is a speculative bubble.

(*calculated on the difference between rent and purchase price. as expensive as rents are, it is still much cheaper to rent in canberra than to buy.)

AG Canberra said :

Justsomeaussie – simple in theory, difficult in practice. What’s to stop the market going too far the other way and there then being no ‘cheap’ houses available to rent?

you mean like now? yes, negative gearing has certainly provided cheap and plentiful rental properties for the ACT, hasn’t it? how many neg. geared PIs *built* new homes to rent? very few, i reckon. most just buy a dilapidated property, put as little as possible into it while extracting as much rent as they possibly can. They are not contributing to the pool of properties available and are certainly not discounting rents out of gratitude for neg. gearing benefits. if neg gearing doesn’t increase property supply (and clearly it doesn’t if most PIs are just buying existing homes) then it will have no downward pressure on rents. neg gearing is neither here nor there–people will charge/pay what the market will bear.

the difficulty in removing neg. gearing is not economic, it’s political. it would be political suicide for any who proposed it. the gov’t–obviously–has no interest in doing anything that would bring prices down. they get too much money from it–and the ACT most of all.

Justsomeaussie – simple in theory, difficult in practice. What’s to stop the market going too far the other way and there then being no ‘cheap’ houses available to rent?

justsomeaussie1:43 pm 21 Feb 11

I’ve raised this before but lets look at it again:

Lots of demand for houses + little/low volume of supply = high prices.
It’s very hard to increase the volume of houses being built = low supply.
Governments give people money and tax incentives to buy houses. Thereby further increasing demand = even higher prices. Bad formula.

So if we accept we can’t change one part of the equation (number of houses being built), we have to change the another part and that is part is the number of houses people actually own.

At the moment there is still a tax incentive for people to own multiple houses, generally once an owner owns more than three houses the purchasing of more houses becomes even easier.

Lots of equity + high rental returns = ability to purchase more houses.

So we need to provide people with an incentive to sell the multiple houses. (increasing supply). We can do this by removing negative gearing for people that own more than three houses.

For example:

John has 6 houses worth in total of 3 million dollars. John knows that in a few years they’ll be dropping negative gearing for people with more than 3 houses so he needs to sell at least three of his. He wants to stay in the property market and reroll his property profits. So John elects to sell 5 of his houses. He then purchases 2 far more expensive houses keeping the total equity of all his three houses at 3 million while freeing up 5 cheaper houses.

So in sum:

We need to effect the number of cheaper houses on the market (increase supply), it’s not going to happen through building more. So we need to encourage people who own a lot of houses to sell some of the cheaper ones, allowing that person to buy the more high end home just in less numbers and allowing cheaper homes to enter the market for first home/lower income buyers.

Mr Gillespie said :

It’s not a question of too many houses being under construction.

The problem is, there are too many new people being added to the system, and these numbers seem to go unchecked.

Exactly. Growth without adequate planning = an unholy mess. And that’s what we’re spiralling into.

Mr Gillespie1:06 pm 21 Feb 11

It’s not a question of too many houses being under construction.

The problem is, there are too many new people being added to the system, and these numbers seem to go unchecked.

Beserk Keyboard Warrior11:47 am 21 Feb 11

I feel like the nature of the new housing is the real problem. Put too many cheap houses together, fast forward to 2030 and SHAZAM – you have a ghetto. It’s a shame, becuase a lack of truly awful suburbs was one of the appealing things about Canberra prior to Gungahlin springing up.

“create a more serious problem down the track in terms of vacancy rates and price growths”

So the current situation of low vacancies and stupid levels of growth is not a problem I guess. At least not for those people who actually own property.

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