A very brave move @Chagsy haha

Can't say it doesn't resonate with my prejudice; but once bitten, twice shy! (or is it 8 times bitten now..?)

I think things become less emotive if we ignore the shelter aspect -- utility and security are HUGE factors when it comes to housing. Buying a house to live in for the next 30 years is an entirely different thing to buying an investment property (although serviceability of any associated debt is always an important consideration).

But if we do just look at the investment angle, I find it incredibly difficult to spot value. Let's use a language we're all familiar with -- that of shares.

Let's pretend the median Sydney house is instead a small cap company. (we could use different markets and different property types, but let's just go with this as an example).

So we have an asset that has a market cap of $1.6m.

Our hypothetical company, if we stick with the averages, has about $600k in debt on the balance sheet.

So the enterprise value is $2.2m ($0.6m + $1.6m).

The average rent for a house in Sydney was $540/week in 2020. So let's assume landlords get $600/week now. Let's round that up to an annual 'revenue' of $32k.

But, as with all companies, there are associated costs. We also have agent fees, council rates, repairs and maintenance etc. Let's call this (perhaps generously) $4k per year. We'll also assume full tenancy (ie no vacant periods in which our 'company' has no revenue).

So our EBITDA is probably around $28k per annum.

So our EV/EBITDA is 78.

If you want to ignore capital structure, and assume there is no debt involved, the PE is 57 (and this is pre-tax). Flip that around for a pre-tax yield of 1.7%.

Now, we all know that a high PE (and low yield) is perfectly fine if earnings are growing well. So the question is, how fast will our company's sales (ie rents) rise?

History would suggest it's hard to sustain rental increases of much more than 3-4%pa. Let's not forget wages have barely grown recently and the latest annual rate is around 2.6% (ignoring inflation). But, hey, if you were ambitious perhaps you could argue for a 5% annual increase in perpetuity.

So, my question is, would you want to buy this company?

Even if earnings were growing at 10% pa, and the company was entirely unlevered, I'm not sure many people would pay a PE of >50.

Sure, the market has been prepared to bid up the multiple historically. But how long can you rely on that? Especially in a rising interest rate environment?

Even if multiples remain steady (and maybe they will), you get a total average annual return of roughly 6-7% before tax. More likely 4-5% under more realistic rental growth assumptions -- and this is on an unlevered basis. Factoring in debt costs, the yield is well below inflation.

It's pretty silly to try and call a 'crash' and put a timeframe on that. That's a mug's game. But my point is that even if you ignore that possibility, you're buying an asset with a extremely low yield whose only prospect for decent returns is an ever expanding market multiple. Reasonable forecasts for cash flows certainly aren't going to let you justify the purchase.

Worse, would you actually borrow to buy such as asset? Would you lever up 5-to-1 or 10-to-1? Heck, some people are levering up 20-to-1 to get exposure to this asset.

And people say bitcoin is crazy ;)

Anyway, I'm just an angry old man shaking my fist at the sky.

Absolutely!

I own a few rental properties and have done for a number of years. Real world yield is much more like 1% across those properties, so suspect you have given numbers at a reasonably favourable valuation!

Much of the reason for doing so wasn't really for yield, of course, but for a) capital appreciation and b) tax deduction reasons. In the current environment, capital appreciation is unlikely but tax deduction would increase as cost of servicing these loans will increase as mortgage rates increase. But the increase in b) will not compensate for the reduction in a): it is definitely time to get out!

Usually the property market adjusts at a far slower rate than the equity market, so they are going on the block come November.

I feel like I relate to that meme more each year... - Here's my take on the housing market at the moment as it relates to Government and other political party policy.

https://www.commongoodparty.com.au/kicking_the_can_down_the_road_on_housing

It's a bit political, so feel free to delete it if you want Andrew.

I do think now is a good time to sell.

I guess as someone out of the housing market, I do wonder what a normal house price looks like. What will it normalise to? (providing the market ends up beating the Government). Low interest rates are driving them up at the moment along with the perceived safety. The weird thing at the moment is that as inflation is above interest rates, this allows for debt itself to be profitable.

Yeah no worries @thebehavioralinvestor , go for it!

I realise this is a bit of a tangent but I've been thinking a lot about Clive Palmer's campaign, specifically his idea to lock in home loans at under 3% for 5 years.

If this were to happen would 1 we not have to pay for it through increased taxes? And 2 would this not introduce a large number of new home buyers to the market, massively increasing demand and drive up house prices? And would that not defeat the whole purpose? It seems to me that it would leave those who can't afford a house out of the market and drive up property prices for those who already own - the rich get richer.

What am I missing?

I don't think you're missing much, @CanadianAussie. In fact, I think there's great merit to your reasoning. I suspect the scheme is another poorly-conjured CP-UAP thought bubble.

@CanadianAussie it's pretty unhinged isn't it? Clive hasn't said how he would do it but look at the options. Is he saying that he would dictate the cash rate? As we all know even if he were the government he doesn't have the ability to do this as it gets set by the Reserve Bank. Would he legislate to take that responsibility from them? You can criticise the RBA's performance - and their record on forecasting and reactionary nature is pretty appalling - but I don't think anyone would argue it would be a good idea to have the government control the cash rate.

So option 2 is that he legislates that banks can't lend above 3%. Let's just pretend he can do that for a minute. What will banks do? They'll immediately stop lending. Economy - Wall - Meets. So then does he underwrite banks to maintain their margins while keeping rates at 3%? Using taxpayer money? I'm sure that wouldn't cost much!! It doesn't really track with his other big promise to pay off Australia's debt.

Not to mention - as you point out - it defeats the purpose. Rates go up to save us from ourselves. Runaway inflation hurts everyone and paying a bit more on your mortgage is the lessor evil.

But will it sound reasonable to people who are getting letters from their bank telling them their repayments are going up? Probably. Will it buy him some votes? Almost definitely. Is it a blatant unworkable corrupt lie? Absolutely.

Ludicrous. Fringe politician.

Nine (NEC) and Seven (SWM) must be raking in the cash with the amount of ads he is running on this stuff.

Founds this article today: CommSec_State_of_the_States_April2022.pdf

I tried using the link while logged OUT of Commsec, and it still worked, so hopefully it will work for everybody. The title is: "State of the States: State and Territory Economic Performance Report, April 2022" (Edition 51)

My home state of SA was actually leading the country in New Homes (Dwellings) Starts, and overall Construction activity in the December quarter...

which says a fair bit I think about the market cooling down in the more populated NSW and Vic.

Tasmania was rated as the best performing state economy overall.

But WA had the strongest economic growth:

NSW and SA had the worst economic growth numbers. It's all growth, which is positive, but WA was growing faster in 2021.

In terms of retail spending, Victoria was leading the way, and, again, NSW and SA were in the lower half. Interesting that Tasmania rated so well on all of these metrics. Who would have thunk it?!

But this thread is all about housing, so the following should be of interest:

It should be noted that these graphs all relate to either the December quarter of 2021, or the year ending December 2021, so things are likely to get shaken up a fair bit from here, with interest rates rising.

I tend to agree with @Stuey727 and his contention that, "houses are for living, not profit; The value of a house must not be seen through the lens of its monetary value, but rather through the value it provides in terms of health, stability, and wellbeing to those who live in it. If people can profit by providing that value, great, but protecting profits should not be the key motivator."

Source: https://www.commongoodparty.com.au/kicking_the_can_down_the_road_on_housing

Little off-topic, but the following was included in Marcus Padley's evening newsletter that I just received, regarding retail sales in Q1 of CY2022:

I assume the lower graph represents monthly turnover volume increases (in percentage terms) for that March 2022 quarter.

Source: HOME - Marcus Today

No sign of a recession there, but since then we've had April and 10 days of May, so far... It does feel like we've turned some sort of corner recently, and the outlook seems even less rosy than it did 6 weeks' ago, and there were plenty of challenges then...