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What’s up guys!
Now look, normally here at The Frugal Samurai, I try and sit on the fence as much as I can when it comes to opinions.
I mean, who doesn’t love a good fence sit?
The fine poise, the delicacy, the balance – a skill I tells ya.
But when yours truly read the following article, I really felt I had to say something, ANYTHING.
Because I felt it was misleading at best and downright dangerous at worst.
What article?
The one here:
What’s it about?
In essence:
- “Economic modelling has revealed home buyers could be paying prices of up to $7.5 million, on average, in some city council areas by the end of 2030 – double what they are currently.
- This assumed property values continued growing at the same average annual rate as over the past 30 years… Sydney house values increased by an average of 6.8 per cent a year over the period, while unit values grew by about 6.4 per cent a year.
- A median priced house in the Greater Sydney area, including the Blue Mountains and Central Coast, will cost $1.74 million in 2030, almost double the current median of $900,000.
- A median priced unit, meanwhile, will grow from $695,000 currently to $1.24 million by the end of the next decade, according to the analysis of CoreLogic and ABS figures”.
It goes on to state that one of the factors was a “dire supply of buildable land… which was one of the key drivers of house price growth in the past”.
This statement I agree with, because if you were paying attention in Economics 101 instead of ogling the pretty international student (ahem, looks down at feet), you would know that price is dictated by demand and supply.
Less supply, more demand = higher prices.
So why are you jumping off the fence?
Firstly, I get that this article is purely Sydney-centric, but you can apply it anywhere.
Secondly, I think that the article is just clickbait.
It is wayyy too simplistic.
Why?
Cos it’s just using the rule of 72, without taking into account any other factors.
Rule of 72?
Yeah, you know that rule?
The one which helps us to do simple compound interest calculations in our head?
You take 72 and divide this by the historical return of 6.8% to come to a rough number of 10.59 years.
Which is what that article assumed.
So?
Again, if you were paying attention in Economics 101, you would know that in academics, there are a LOT of assumptions.
Ceteris Paribus as we are always told in the textbooks.
Which, for everyone who doesn’t speak Latin and/or are too busy staring at pretty international students, means “all other things being equal”.
Unfortunately in reality, all other things are NOT equal, otherwise academics would be the richest individuals on this planet.
Income
I say this, because the article either conveniently forgot or was completely ignorant of, what I think, is the most important factor when it comes to property price growth.
That being… INCOME.
For property prices in Sydney to double, you would assume there to be a commensurate doubling of income growth.
Except…
…
It isn’t.
What’s the growth?
Well, apparently NSW as a whole grew 2.2% from the last quarter’s data.
But you know what?
YOLO, I’m going to say Sydney’s income will go on a tear and grow at a whopping 3.2% from now until 2030…
Cos Ceteris Paribus Muthachuckas, #ThUgLyF
So let’s project it out at a 3.2% growth rate until 2030.
Why 3.2% though?
Cos it’s the long-run growth rate.
Taking the latest ABS census data, we see that the family income for Sydney back in 2016 was $1,988 per week.
Bear in mind this is gross of taxes (i.e. tax not deducted).
But hey, let’s be liberal again – let’s just annualize the f$@ker.
$1,988 * 52 = $103,376
So compounding this amount to 2030 at 3.2% p.a. is…
W00t! $165,811
That’s a fair amount of moolah… and what I am… not on currently.
So what?
So let’s take it back to the numbers in the article.
Let’s say prices for a house will cost $1.74 million in 2030.
Using a trusty bank (ha! Oxymoron) calculator, a standard 80% loan is $1,392,000.
And let’s ceteris paribus it at 3%, cos hey – historically low interest rates usually means they’ll remain so in a decade’s time right?
So at 3% on $1,392,000 – the interest repayments come to $3,480/month or $41,760/year.
And if you ever wanted to pay down the principal, it comes to $5,869/month or $70,428/ year.
Ouch.
OK, so we can’t afford a house, what about a unit then?
$1,240,000 @ 80% loan = $992,000.
With repayments coming to:
$2,480/month or $29,760/year for interest only.
And
$4,181/month or $50,172 to paydown the principal.
Seems manageable…
Um yeah, if your family income is $165,811… AFTER tax then yeah, maybe.
But remember how those figures were pre-tax?
Again, let’s ceteris paribus… btw how easy is academia, just insert assumptions EVERYWHERE…. anyway, let’s say we split the income evenly… $82,905 between you and your partner.
That comes down to $63,836 each at today’s tax rates.
So a family income of $127,672 take home pay.
Ummm…
Yeah.
If your family is taking home $127,672 can it afford annual repayments of $41,760/year for just the interest? Or if you wanted to pay the loan off then how about $70,428/year?
What’s that? Maybe for a unit?
Then it’ll be $29,760/year for just the interest, or $50,172/year to pay it off…
So…
So what this article’s saying is:
People are either not going to be able to afford a place to live (probably).
OR
People are going to be mortgaged to their eyeballs in mortgage stress (likely).
OR
People are going to say… wait a minute, Ceteris Paribus was only useful to impress pretty international students – in real life, we can choose to y’know not buy if we can’t afford to (most probably likely).
And so if most people can’t afford something… well, again demand versus supply should dictate that the price falls.
Which means that housing prices don’t double in 11 years?
Because past performance can’t be relied upon as an indicator of future performance?
Because the media is there to sell eyeballs? (No, not literally, that is frowned upon in most countries).
Final Thoughts
But wait guys!
There’s more…
I mean, what if our income growth doesn’t reach long-run averages? What if they stagnate further?
But wait! What if they do?
Well, then… that would mean our economy is doing great!
Which means that… interest rates should creep up… (shuffles feet uncomfortably).
Wait, wait!
What if our interest rates keep going down?!
Um so… rates are cut when things aren’t doing so well, forget wages growth, you’d be thankful to have a job.
Final, final thoughts.
However, circling back to the headline – I can see prices rising to $7.5 million in certain areas by 2030, that being the most affluent and economically advantaged, because these are the highest income earners of the population.
When properties are traded in the multi-millions, it’s usually a different demographic buying them. Who knows what new businesses and technological marvels will occur by 2030 to mint the new multi-millionaires?
And I will put it on record my opinion that prices in Sydney will be higher in 2030 than they are in 2019 – but I am extremely skeptical of it doubling, not without the associated income growth.
So what do you think guys? Do you think this all made sense? Agree? Disagree? Where do you think prices are headed? Let me know in the comments!
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