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Thanks @Graeme I didn’t realize Oz has this issue too. I wonder if the supply is constrained by the wildfires having destroyed homes? I’ve visited Perth and Sydney and loved them, so I can see the appeal.
As @Appfaff indicated in the (very entertaining) podcast, the dynamics are changing in real estate, and not just high end vacation homes. And even when the high end of the market is impacted, it seems to carry downmarket.
I’d never have predicted this (or for that matter stock markets’) reaction to the COVID economy. At times I’ve thought we waited too long to make a move but then I look at how things are set to unfold and I think we may have played things perfectly (again, more by luck than design, though plenty of both).
More broadly I am concerned about the long-term impact of such a difficult housing market on people trying to get a leg up. Home ownership can make or break your financial destiny and it’s good to have more “make” than “break” opportunities from an economic standpoint. Since we’re also facing a retirement crisis, perhaps the inflated home prices will help some homeowners make up for lost time getting their nest eggs where they need to be. But it’s definitely been a rough road for generations entering the job market since 2008.
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As @mclaincausey said, home ownership has been a way to financial independence for a lot of people for a very long time, especially in the US where the wealth (and subsequent housing market) gaps can be almost unjustifiable to some degrees.
One interesting thing to understand is that the housing market may feel "inflated," now, but in all actuality, it took a very long, slow road to recovery from the 2008-2010 timeframe. While the peak of pricing say in 2006-2008 was caused by a combination of demand from buyers who were (my opinion) immorally approved for larger payments than they could safely justify, the prices now (in most US markets) are being driven by an opposing segment marker which is used in a healthy market, which is new inventory (new construction) coming to market.
A healthy market can be measured by the amount of new construction product coming into a space, which adds to the total pool. Every market is different, but in our market, even before COVID, we were already 12 months "behind" in new construction being added to the pool of available homes. I do know in similar markets near us, such as in Alabama where I used to actively sell, the amount of new construction SEEMED overwhelming, but data showed even they were 6-8 months behind on demand.
When COVID happened, things such as lumber prices, and states where construction was considered non-essential did slow construction down, which only worsened the situation for most markets who were already behind. Nationally, two of the largest builders actually decreased pulling new building permits by 30-60% in certain markets, as they were hedging their bets on a crash.
No one could have known, but most analysts say "with more people spending time at home," and a 200%+ increase in YOY real estate searches online, people began dreaming of the only place they COULD live as they wished - which was home.
The Bad News: Markets nationally are tight. Competition for purchases are cut throat, and people are paying way above appraisals for properties (notice I did not say "paying too much," as "it's worth what someone is willing to pay in the moment" - the trend in cash only further justifies this).
The Good News: The average credit score of a buyer in 2006 was 530. The average credit score of a buyer in 2021 is 760+. What that means is that the "demand" for homes is not indicative of an artificial crash as we saw a decade and a half ago. In reality, people are putting hard cash down to cover appraisal gaps, and in a lot of cases, by the time a home closes through a 3-6 week contract term, the appreciation is catching up to the contract prices, and people oftentimes even have built-in equity. This is good news, even for those who "feel" they are overpaying in "today's" market - they are still building wealth.
Dave Ramsey (I don't love him, but this was a good perspective) said - the best thing you can do right now is to stay in the market. If you love your home, stay in it. If you sell, you should try to buy again, not rent. Mainly because "you are all on a level playing field," in your market. If you step out, and try to step back in in 6 months thinking it will slow down, you might not be able to buy what you could 6 months prior.
I can't speak regarding the ultra-major metros (San Fran, LA, NYC, etc) or overseas, but this is causing of a lot of what we are seeing around the US.
In you are in a market that offers space, a positive climate for business, or a lifestyle that the big cities can't offer, demand by the mid tier property buyers will continue to feed this, especially as the high paying jobs are no longer tied to a physical location, local salaries will no longer have as much impact on local real estate pricing, no matter where it is.
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That resonates…. If you already have a home, yeah, you may have to pay more for your new one, but you'll also make more on the sale of your current one. So if you are smart (and lucky), you can move upmarket without becoming house-poor. Especially with interest rates unlocking a lot of purchasing power for the time being.
Some areas (Golden, Boulder) have geological constraints on where you can build (read: mountains denying real estate acreage, just like the Bay does in the Bay Area), and some (Boulder) have significant policy constraints on expanding residential capacity. Even in Denver, less burdened by those factors, the economics are not helping the supply... if you can't build out, build up... Why wouldn't a developer build condos, duplexes, and apartments instead of the detached housing that we really want?
On the materials costs (and the contracting labor market) piece, doing an extensive renovation on our home was not an attractive option versus buying a new place right now. But we would have done that before moving into a house with more space that wasn't as nice--we already identified a way to make the old house scale beautifully.
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Australian property is generally expensive, I'm not sure why given the country is close in size to the lower forty-eight states and has less than a tenth of the population. It's worse on the East Coast. The median house price in Sydney is $1.3 million ($1 million US), about the same as the Bay Area in California, whilst Melbourne and Canberra are closing in on a million (nearly $800K US at current FX rates). In the nicer parts of town, you'll be looking at twice that for a relatively modest place.
As an example, there was a news story about a derelict one bedroom house selling for $1.6 million (nearly $1.3 million US) this week. It doesn't look special in the listing.
I know that @Appfaff likes mid-century properties, and I loved a Sydney Ancher house on Sydney's North Shore that came up a few months ago. Two or three bedrooms and needs everything doing, still fetched $1.87 million (nearly $1.5 million US).
The market dynamics are probably similar to the US: Government stimulus has found its way into the property market, low rates make it cheap to borrow, and people are willing to spend more, particularly if they'll be stuck at home due to lockdowns.
Building lumber is the new Bitcoin here too.
The difference with the US is that there's a massive number of investors over here. I've heard that around 40% of mortgages are for property investment purposes. This is supported by very generous tax breaks, chief of which is negative gearing.
This allows an investor to write off the losses on a rental against their overall tax bill. Suppose I was in the top bracket for income tax, and paying a rate of 50%. I own an investment property that rents for $2000 a month, but the interest payment is $3000 a month, so I'd be out of pocket by $1000. However, I would be able to deduct this from my taxable earnings, and so it would actually cost me $500 a month, which makes it easier to carry.
So I'm losing money on a rental property, that's not the way to build wealth, right?
The other part of the equation is capital gains. Over the last twenty to thirty years, Sydney property has increased by an average of nearly 8% per year. If I bought my investment property in 2011 or 2012 for around a million dollars, it'd maybe be worth twice that now. My income tax bracket is 50% in this example, but this is halved by the capital gains concession (you pay half the tax on capital gains if the asset is held for a year), so I would keep $750K of that, and be up nearly $700K after the rental losses. Not a bad return, assuming a 10% to 20% deposit to buy it in the first place.
Another driver is that a lot of older houses sit on relatively large blocks. Somewhere like @mclaincausey's home, were it in Melbourne or Sydney, would likely be sold to a developer, demolished, and replaced with several smaller units, especially as it's sitting on a corner. Because of this, what would be the cheaper end of the market is priced as the land component for a development, and inflated accordingly.
I don't know what the best plan of action is. If you want to buy into Sydney or Melbourne, you need to take on a massive amount of debt to get somewhere decent. But if you wait, every time the market softens, the government pumps in a huge stimulus to reinflate it.
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Fascinating - thanks for sharing dude - it’s crazy to see all the differences - especially capital gains!
I know the tax game well… I had a fearfully expensive rental that got destroyed during the hurricanes last year and we fixed, and sold
In December. I will admit, it ended up working to our advantage tax wise, as it was a monthly loss even before the repairs.Back to what we all love - cool ass houses - if I was rich, I’d forget the beach house and get bad boy near Clint
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If you want to stick with Frank Lloyd Wright protégé's houses, this house in Melbourne really does it for me.
It was designed by Walter Burleigh Griffin, who was born in Chicago and worked under Frank Lloyd Wright in the 1900s. He emigrated to Melbourne, where he designed several houses, and laid out the suburb of Eaglemont. He would subsequently go on to plan Castlecrag in Sydney, and Canberra.
I took a look around the house last time it was on the market in 2016, and it's a lovely place. It's undergone one of the few renovations that actually significantly improve it.
However, since this is an imaginary "if I were rich" purchase, I would also pick up the neighbour, which was carved out of its block.
Unfortunately, the asking price on this property is now $4.4 million (about $3.4 million US), and the neighbour last sold for $2 million in 2016, so would be rather a lot more now…
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Damn, that really is lovely.
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Wow that's wild! Looks like concrete block?
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This is my dream property:
https://www.bcarc.com/residential/edgeland-house
This lot is just east of downtown, on the bank of the Colorado River. The property owner bought an old brownfield lot and did a considerable amount of land remediation due to an old existing oil pipeline on the property. The house has all sorts of energy conscious features and is largely unnoticeable from the street which I love. The wildflowers and native landscaping are right up my alley too. The only downside is that I would need a garage/workshop.
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A friend worked with the developers of this modest, unassuming little property.
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@mclaincausey - at least they chose the right listing company!
Nearly an identical home sold by us in DC area last year - I actually had to do a double take!
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Wow that's wild! Looks like concrete block?
It's built with Burley Griffin's Knitlock system, which uses specially shaped concrete sections that fit together to build a wall.
Students in Melbourne University's architecture department ran a project on it a few years ago, and recreated Pholiota, which was Walter Burley Griffin's own rather modest home. (It had about 450 square feet / 40 square metres of internal space.)
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I was browsing property listings in Sydney earlier, and this little place came up.
Two bedrooms, needs a bit of a renovation. Could suit me.
Of course no guide price is given, so I dig around in the web page's metadata and get the marketing expectations: Around $3 million (Australian), which equates to $2.2 million (US), £1.6 million, or €1.9 million. :o
I think that I'll pass…
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@goosehd the rate of increase might have slowed down slightly from July, but they haven't gone into reverse.
I agree that it's crazy and it sucks. Sydney prices make me think that the Bay Area in the US is reasonable, and I could get paid twice as much if I sold my soul to Zuckerberg.
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I've not really been looking. I have thought for a long time that prices are high, but the housing market is cyclical so they'll come down eventually.
And then they double. Again. :o
The trouble in Australia is that there hasn't been a crash in recent memory. Unlike (say) the US or Ireland, prices didn't fall significantly after the Global Financial Crisis in 2008, so there's a belief that property is a one way bet. Plus the government pumps the market up with incentives whenever it starts to slide.
