Compound growth in house prices over ?

[Shonky.]

what does "compound growth" mean in this context?

I always thought compound growth meant when one reinvests interest earned in the previous period to accrue interest in the next.

How does one do that with a house?

Unless she means that because the increase in value of the house is stored it is implicitly reinvested in perpetuity.

But then by that definition saying "compound growth is over for good" means that housing prices will only remain constant or go backwards???

Please explain Gail

[2011G6E]

About time...houses are still way overpriced, but are still falling in a lot of areas. We've been watching the house market in Rockhampton for about four years now, and prices have fallen steadily (despite what frightened looking real estate agents say in the local paper ). We just sold a house in Bundaberg...we bought it in 2000 for $75,000...a pretty normal price at the time...and sold it for $169,000 needing some reno work. Houses are cheap in Bundy, around the corner from my mothers place is a five bedroom house on a decent block fully renovated for $260,000...pretty expensive for Bundy.

We've seen the same houses for sale for a loooong time in Rocky, with the price slowly dropping month to month. We'll probably buy later in the year, but they'd better expect some drastic reduction in the offered price we make...it's a buyers market and has been for some time.

[Yellow_Festiva]

Originally Posted by XB GS 351 Coupe

Re affordability, I believe housing is more affordable these days, people are just expecting more, my parents bought a house in the early 80's for 60K, 1/4 acre block, three bedroom no garage, no air con, fairly small compared to the 4-5 bedroom walk in wardrobes, ensuite, three car garage, ducted air and heating people expect as a first home today.

Doubt it's more affordable today.. actually quite the opposite.

I can't remember the exact statistic... 4-6 decades ago the average house cost 3.? times the average wage.

Now the average house costs 8-9 times the average wage.

Then, think of all the other gadgets / dsitractions / financial commitments we have these days to add to the cost of living that wasn't around back then???

We get paid heaps more these days, but the money buys less...

[GT0132]

My 2c

While you have a commodity that's in demand it cannot be a dead set certainty that its value won't increase.

The demand for housing can only increase where there are net increases in migration and no commensurate increase in building activity. However in the mix this time is the fact that many who would otherwise be buying or upgrading are holding on to their cash, not borrowing (or not adding to their existing borrowings) and instead seeing what happens regarding our current econonic problems. As we all know, unless you're in an area positively impacted by the mining boom things are pretty bad right now economically. I suespect most if not all of the Eastern states are in recession.

[Dr Jekkyl]

We're different.

[flappist]

Originally Posted by 2011G6E

About time...houses are still way overpriced, but are still falling in a lot of areas. We've been watching the house market in Rockhampton for about four years now, and prices have fallen steadily (despite what frightened looking real estate agents say in the local paper ). We just sold a house in Bundaberg...we bought it in 2000 for $75,000...a pretty normal price at the time...and sold it for $169,000 needing some reno work. Houses are cheap in Bundy, around the corner from my mothers place is a five bedroom house on a decent block fully renovated for $260,000...pretty expensive for Bundy.

We've seen the same houses for sale for a loooong time in Rocky, with the price slowly dropping month to month. We'll probably buy later in the year, but they'd better expect some drastic reduction in the offered price we make...it's a buyers market and has been for some time.

Bundaberg? You mean the city with the most bankruptcies in QLD?

Try buying a house in Buderim or someone like that.....

[|||]

Originally Posted by Jim Goose

Its everyones right to be able to own a home

that's a good point. if the government expanded the department of housing & took control of the real estate market we could all exercise our right to home ownership

[karj]

Originally Posted by |||

that's a good point. if the government expanded the department of housing & took control of the real estate market we could all exercise our right to home ownership

We actually do have the right to housing, but not home 'ownership' as such. Although in a broader sense, we also have a right to own 'property'.

It comes under the United Nations UDHR (Universal Declaration of Human Rights). Says something to the effect of having the right to a standard of living adequate for health and wellbeing, which includes housing amongst other things. So affordable housing is a basic human rights issue.

[2011G6E]

Originally Posted by |||

that's a good point. if the government expanded the department of housing & took control of the real estate market we could all exercise our right to home ownership

...Or brought in rent control as has been done in other countries. It's frankly criminal that houses in my area are being rented out at up to nearly $4000 a week in some towns. Ones in my town are nearly a grand a week, ones in Blackwater are well over that. Moranbah is eye-watering.
The trick is, a house...cheap kit homes like they throw up in weeks...don't cost much more to build out here than down the coast, and land isn't that much more either. It's just greedy landlords snapping up old houses and filling them with miners.
One house recently sold in our town and eight miners have moved in. Another sold and at least four or five will be living there...god knows what the landlord is charging the mines for them.

[zx10]

The housing market in any area that the resources sector has impacted is so messed up its not funny.

[ford man xf]

Have to love the coverups by the lenders:

http://www.youtube.com/watch?v=mgVda...eature=related

[ford man xf]

Get rid of negative gearing to solve a few issues.
Australia would have to be the only country in the world that negatively gears property investment surely?

[Resurrection]

Dave289 was right.

[Yellow_Festiva]

Originally Posted by ford man xf

Have to love the coverups by the lenders:

http://www.youtube.com/watch?v=mgVda...eature=related

While that clip is over a year old a lot of what is said is still correct today IMO.

I was going to do a little buying and selling over the next few months, I'm seriously considering not doing both to be honest.... It's all crystal ball stuff, but my reckoning is that it will make me more short term money now by holding on to what I already have, and save me in the long term if prices do go down.

I don't see rental costs going south any time soon, purchases prices?? Undecided. If there is a housing deficit as the experts say rentals will always be sought as more people would be in the rental market rather than the buying market should things be uncertain.

[GT0132]

Originally Posted by ford man xf

Get rid of negative gearing to solve a few issues.
Australia would have to be the only country in the world that negatively gears property investment surely?

Julia Gillard rules out scrapping negative gearing tax provisions for property investors By Larry Schlesinger
Tuesday, 12 June 2012

Negative gearing tax breaks for property investors will not be removed, says Prime Minister Julia Gillard.

Gillard says her government has ruled out removing the tax break.

It was in response to a question asked on the ABC’s Q&A program.

“We didn’t agree with the Henry Tax Review,” Gillard said.

“We think that an abolition of negative gearing will cause distortions to the property market that we did not want to see,” she said.

The federal opposition also appears loath to remove the tax break, with Coalition spokesman Joe Hockey tweeting after the broadcast that negative gearing “holds down rents... just ask Bob Hawke and Paul Keating. They tried to get rid of it and reversed their policy.”

However Sarah Toohey, spokesperson for lobbying group Australians for Affordable Housing, disagreed with Hockey, tweeting that “rents only rose in Sydney and Perth when Keating changed [negative gearing].

“[Rent rises] have been nationwide if that [were true],” she tweeted.

Property buyers’ advocate Catherine Cashmore agreed with Toohey, tweeting that negative gearing needed to be phased out.

“No other country has such a generous gearing policy – it does nothing to ease housing affordability,” she tweeted.

Negative gearing was used by around 2 million property investors in the last financial year to reduce their tax bill, according to ATO figures.

A property is negatively geared when the costs of owning it – interest on the loan, bank charges, maintenance, repairs and capital depreciation – exceed the rental income it produces.

The Henry Tax Review called for a raft of investment tax breaks – including negative gearing – to be replaced with a 40% discount on the marginal tax rate.

I think there's no chance it being abolished. Labour doesn't want to smash the battlers and Liberals don't want to smash the mum and dad investors.

Only chance would be if the Greens got a majority somehow

[karj]

“We think that an abolition of negative gearing will cause distortions to the property market that we did not want to see,” [Julia Gillard] said.

No, it would re-balance the property market, not distort it. It's currently distorted because of negative gearing. She doesn't want to remove it because it would be massively unpopular with the upper-middle class and lead to losses for these people who have invested in property with the aid of negative gearing.

The federal opposition also appears loath to remove the tax break, with Coalition spokesman Joe Hockey tweeting after the broadcast that negative gearing “holds down rents... just ask Bob Hawke and Paul Keating. They tried to get rid of it and reversed their policy.”

That is not what Hawke/Keating found in the 80's.. Negative gearing doesn't hold down rents. Rent didn't rise across Australia after they abolished it, rent only rose in Sydney & Perth and this didn't have anything to do with the abolishment of negative gearing. The REIA led a strong campaign in the lead-up to the 87 election and Hawke/Keating had to reinstate the policy to stem the political damage.

Negative gearing creates a housing bubble. It spawns investors who compete to buy property, thus pushing house prices up. More rent then has to be charged to cover those larger investor loans.

[ford man xf]

Thanks for that arcticle. I knew a lot of Australians are negatively geared at the moment in properties, but 2 million last financial year staggers me, that is a huge figure, no wonder neither Labour or the Liberals wan't to upset any property investors.

[MAD]

Originally Posted by ford man xf

Thanks for that arcticle. I knew a lot of Australians are negatively geared at the moment in properties, but 2 million last financial year staggers me, that is a huge figure, no wonder neither Labour or the Liberals wan't to upset any property investors.

But at the same time they're happy to forgo millions in tax revenue.

[Shonky.]

Doesn't negative gearing encourage investment in essential infrastructure?

We can still continue to build more houses (albeit further out) as long as people want to buy them.

It's a genuine question? I don't know the answer.

Someone will say that removing negative gearing will push property prices down making housing more affordable for buyers and pushing rents down.

But if people are going to miss out on the tax benefits of investing in housing they will need higher rents to offset it or will invest elsewhere. Then you will have housing shortages

You could chase your tail all day on this stuff. There will never be consensus amognst Economists even if they were able to decide without any political influence other than to come up with the best outcome.

[ford man xf]

Originally Posted by shonkymofo

Doesn't negative gearing encourage investment in essential infrastructure?

We can still continue to build more houses (albeit further out) as long as people want to buy them.

It's a genuine question? I don't know the answer.

Someone will say that removing negative gearing will push property prices down making housing more affordable for buyers and pushing rents down.

But if people are going to miss out on the tax benefits of investing in housing they will need higher rents to offset it or will invest elsewhere. Then you will have housing shortages

You could chase your tail all day on this stuff. There will never be consensus amognst Economists even if they were able to decide without any political influence other than to come up with the best outcome.

The problem is that a lot of investment properties are purchased as established homes. One suggestion is that negative gearing should only be allowed on newly built homes as this encourages numerous econmic benefits. I don't know if this would work though because an investor isn't just interested in the tax breaks and rent money, a smart investor want's to see a return in property value also when they choose to sell, newly built properties 50-60km from a cities CBD don't offer such sweet returns as the inner city/fringe suburbs do.

[GT0132]

Originally Posted by MAD

But at the same time they're happy to forgo millions in tax revenue.

Think of negative gearing as a tax benefit to members of the public who assist the government to provide housing to those in need. Without private investment in residential property there would be a lot of homeless people as there just ain't enough public housing to go around.

I get sick of the mentality held by some that those who use negative gearing strategies are wealthy investors investing in property with the primary objective to obtain a tax benefit. There are many property investors out there using NG who are not overly wealthy but are Mr and Mrs average trying to provide for their retirement and not be a burden on the government.

[ebxr8240]

With the economy the way it is..
Nearly everything is slowing down..
Not just real estate...
Back when NG was abolished. Many investors got out of rentals which caused a housing shortage..
One thing you have to keep in mind.. The average family investing in rentals is trying to set themselves up as self funded retires..
If they didn't ?? Chances are they would be drawing a pension..

[karj]

OK, bit of a long post.

At its simplest, real estate as investment is the problem and negative gearing encourages investment in real estate.

What happens is this.

People who already own or are paying for their 1st house realise that they can use the capital in that house and negative gearing to get a loan to purchase another as a viable investment. Then they realise they can get another loan and purchase another house after that. And so on it goes until you have a property portfolio.

Meanwhile, other homeowners are realising that they can do the same thing. So what you end up with is a whole heap of investors buying property. These investors can get larger loans than people who don't already have the benefit of being able to leverage the capital of their 1st house (talking about first home buyers).

So you have a bunch of investors competing with each other with money they got from the bank. House prices skyrocket as a result of this competition (artificial inflation).

These investment houses are then rented out... but in order to be financially viable, rent has to cover most of the interest generated by the large mortgage. Rent then skyrockets to accomodate for that, so you end up with a large number of rental properties available, but with artificially inflated rents.

The argument is that negative gearing makes the investment more viable so less has to be charged in rent to recoup the cash loss. But negative gearing encouraged the investment in the first place, so it's a pointless argument with very little merit.

End result is a housing bubble - very expensive house prices and very expensive rents. Government tries to address this with first homeowner grants... but this just further inflates the bubble.

Banks and real estate agents like housing bubbles because they get insanely rich off them.

Private rentals are important to take the strain off public housing... but if house prices were affordable, there wouldn't be such reliance on public housing or rentals because 1st homeowners would be able to break into the market. You wouldn't somehow end up with a mass of homeless people.

I'm not in any way demonising property developers or people (mum & dad investors) using the current system to better their position. It's just that the current system of negative gearing is bad policy.

However, removing it now would cause significant financial issues for current investors as it would devalue property and these people would have loans that exceed their property value. The best time to remove negative gearing (and it should be removed) is when the housing bubble gets so artificially inflated that it bursts. Unfortunately, investors will lose money when that happens.

The sharemarket remains the best option to invest if one wants to set themselves up for retirement. It is more flexible than real estate, allows for greater long term returns and doesn't cause the same major societal/class issues that investment in real estate does.

[b0son]

Originally Posted by karj

At its simplest, real estate as investment is the problem and negative gearing encourages investment in real estate.

You can negative gear share investments....

These investment houses are then rented out... but in order to be financially viable, rent has to cover most of the interest generated by the large mortgage. Rent then skyrockets to accomodate for that, so you end up with a large number of rental properties available, but with artificially inflated rents.

You need to acquaint yourself with the concepts of supply and demand. A glut of rental properties puts downward pressure on rents. Owners cant just pass on their costs.

The single biggest issue affecting property prices is credit availability. The most recent housing bubbles worldwide were caused by lax credit standards, and we know how that ended.

[karj]

Originally Posted by b0son

You can negative gear share investments....

Yes you can. But investment in shares doesn't have the same impact on the cost of housing that investment in property does.

Originally Posted by b0son

You need to acquaint yourself with the concepts of supply and demand. A glut of rental properties puts downward pressure on rents. Owners cant just pass on their costs.

It is not just simply a supply and demand issue. Supply and demand is location specific and is a problem in some areas (and dealt with by local government). Negative gearing applies nationally. You can only negative gear if you run at a cash loss, but in order to make the cash loss bearable, rent has to cover most of the interest generated by the loan, otherwise the investment fails. The supply of rental properties is not pushing down rents because the investment in property is pushing up property prices and negative gearing encourages that investment. Owners/investors can simply just pass on their costs because everyone is in the same boat... thanks to the bubble.

Originally Posted by b0son

The single biggest issue affecting property prices is credit availability. The most recent housing bubbles worldwide were caused by lax credit standards, and we know how that ended.

I agree that is a problem (a big one actually) and I might just point out that credit is more readily available to investors because they can use their current property as collateral (equity home loans).

There's a number of issues that affect the market and you can see that very clearly in the cost of property in towns experiencing mining booms.

Abolishment of negative gearing in property is not a silver bullet to solve all the issues, but it is certainly a big part of the issue.

[b0son]

Originally Posted by karj

You can only negative gear if you run at a cash loss

not quite. you can negative gear cashflow positive properties if the depreciation deductions are large enough to offset the the positive income.

i would argue a better way to approach this would be to treat rental properties similarly to non-rental properties. IOW, only allow deductions of a capital nature at the time of sale rather than year to year. this would have a significant impact on the tax saving which is what a lot of investors chase with negatively geared properties.

i dont agree with scrapping negative gearing on properties unless you do it for ALL investments. favouring one investment almost always results in a bubble in that asset class. remember the run on the sharemarket immediately prior the GFC when the government made superannuation changes favouring big deposits tax free? the super funds flooded the sharemarkets with billions in cash, driving up share prices.

the investment in property is pushing up property prices and negative gearing encourages that investment.

negative gearing is only beneficial if price growth is likely. few investors believe there will be significant gains in house values.. you dont negative gear unless price growth ahead of the interest cost is likely over the long term. noone believes it is.

Owners/investors can simply just pass on their costs because everyone is in the same boat... thanks to the bubble.

the bubble was years ago now. prices have been all but stagnant in most areas (other than a few always in demand trendy locations). if owners can pass on costs, its because people are willing to pay them. fewer people are sharing than ever, people are renting bigger houses than they need, people are putting immediate lifestyle ahead of future savings.

Abolishment of negative gearing in property is not a silver bullet to solve all the issues, but it is certainly a big part of the issue.

History says otherwise. Last time a government played with removing negative gearing, rents soared.

[Shonky.]

To push up the amount of housing you need to either move the supply curve or the demand curve.

I think there is general consensus that supply side economic policy (such as Negative gearing) is more effective than demand side (such as first home owners grant)

The First Home owners grant was almost immediately reflected in house prices = completely ineffective policy

I think the most important thing for policy makers is just a steady steady approach. Nothing dramatic like abolishing tax incentives on housing investment (a revision maybe though)

[karj]

Originally Posted by b0son

not quite. you can negative gear cashflow positive properties if the depreciation deductions are large enough to offset the the positive income.

i would argue a better way to approach this would be to treat rental properties similarly to non-rental properties. IOW, only allow deductions of a capital nature at the time of sale rather than year to year. this would have a significant impact on the tax saving which is what a lot of investors chase with negatively geared properties.

I'm just not sure that would have an overall effect of making house prices more affordable, although it may.

Originally Posted by b0son

i dont agree with scrapping negative gearing on properties unless you do it for ALL investments. favouring one investment almost always results in a bubble in that asset class. remember the run on the sharemarket immediately prior the GFC when the government made superannuation changes favouring big deposits tax free? the super funds flooded the sharemarkets with billions in cash, driving up share prices.

That's a fair point. Although I would suggest that the negative gearing in this country is set up to favor investment in property by middle class Australians, and that resulted in the housing bubble.

Originally Posted by b0son

negative gearing is only beneficial if price growth is likely. few investors believe there will be significant gains in house values.. you dont negative gear unless price growth ahead of the interest cost is likely over the long term. noone believes it is.

the bubble was years ago now. prices have been all but stagnant in most areas (other than a few always in demand trendy locations).

True that prices have been stagnant, but they haven't plumeted dramatically. My concern is that once things pick up in the global economy and confidence is restored domestically, then things will pick up again and the bubble will re-inflate beyond what is was a few years back. Some think it's over for good, but I'm not so sure about that.

Originally Posted by b0son

if owners can pass on costs, its because people are willing to pay them.

Not necessarily. In many cases I would argue that people have no choice but to pay these increased costs, because there is little alternative.

Originally Posted by b0son

fewer people are sharing than ever, people are renting bigger houses than they need, people are putting immediate lifestyle ahead of future savings.

That is also a fair point, but household savings have always been low in this country. Apparently in the wake of the GFC people are saving more.

Originally Posted by b0son

History says otherwise. Last time a government played with removing negative gearing, rents soared.

An analysis of the statistics shows that rent only rose in Sydney and Perth when Hawke/Keating abolished negative gearing. If the abolishment of negative gearing caused rent to soar, that trend would have been echoed throughout the entire country, not just 2 capital cities. The reason they had to reinstate it was because in the lead up to the 87 election, the REIA stepped up their campaign against the abolishment of negative gearing and it was causing too much 'politcial' damage. History shows that rents didn't soar when negative gearing was abolished.

I'm not the only person who believes negative gearing has contributed to unaffordable housing. It's a sentiment that has been expressed by the RBA at different times as well as other economists.

[ebxr8240]

One part often not bought up..
Is everyone wants to live near CBD...
Especially first home buyers..

[Road_Warrior]

Originally Posted by ebxr8240

One part often not bought up..
Is everyone wants to live near CBD...
Especially first home buyers..

I don't, I wouldnt live near the CBD if you paid me

Which is why we're looking at places 20klm out but with easy access to a railway line.