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If You Thought US House Prices Were High, Check out Australia!

by Mark Ferguson on July 6, 2014 · 12 comments

  
If You Thought US House Prices Were High, Check out Australia!

I get a lot of investors from Australia asking me how I get such great returns on my rental properties.

I have my 11th rental property under contract and I get $400 to $500 cash flow on my rental properties that I buy from $80,000 to $130,000 with 80 percent loan to value mortgages in place.

It is pretty easy to answer them why I can get better returns than them; I am not in Australia!  I had heard house prices in Australia were out of control, but I had no idea how out of control until I looked up the numbers.

What are House Prices like in Australia?

The median price for a house in Australia is AU$539,400 (US$489,538), according to ABS Now if you think high rents make up for the high prices, think again.

The median rent in Sydney is AU$500 (US$ 456.85) for houses and AU$470 (US$ 429.44) for units.  Sydney is the highest priced area in Australia with a median house price of AU$633,200 (US$574,667).  Next time you complain about houses not meeting the 2% rule, think about the poor investors in Australia!  They can’t even hit the .02 percent rule!

Why are House Prices so High in Australia?

Australia has had rising house prices for years and many experts have predicted a housing crisis is right around the corner in Australia.  However, it has not happened yet.

Related: How I Bought “Australia’s Cheapest House” (And what it Means For YOU)

The government pumping a lot of money into first time home owner programs so that people can buy houses and the government is keeping interest rates extremely low.  The biggest reason housing is so expensive is there is extremely high demand and little housing available (like much of the US right now).

One of the main causes of the crazy housing market in Australia is foreign investment.  China has become a major player in the world economy and right now many wealthy Chinese have chosen Australia as the place to invest in real estate.

Why Don’t they Build more Houses in Australia?

This is pure speculation on my part, but I think builders are scared of a housing bubble.  I remember 7 years ago in Colorado when our bubble burst.

There were half-finished subdivisions and houses all over with many builders going bankrupt.  I think many builders are still scared to build in the US, because they are not sure how stable our recovery is.  When builders won’t build and there are not enough houses for everyone, prices are going to increase.

What Will Happen to Australia’s Housing Market?

Your guess is as good as mine, I am not an expert on Australia housing, but it is an interesting situation.  I imagine the prices cannot keep increasing and prices will come down.

Related: The Coming Crash in the Canadian Housing Market

However, I also know there are many Australian investors waiting for those prices to come down so they can buy some decently priced homes.  Will those investors and other home buyers waiting for a decent priced home let prices drop like they did in the US? Doubtful, but we will see.

Any Aussies out there?  What is your take on the market?

Be sure to leave your comments below!

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{ 12 comments… read them below or add one }

Steve July 6, 2014 at 5:37 am

Thanks for your article. Australian house prices have been high for decades so builder attitudes are not really the problem. The culprit seems to be over regulation: government charges, uncertainty, time to approval, and and land rationing. See:

http://demographia.com/dhi2013.pdf
http://www.ahuri.edu.au/publications/projects/p70393

Having some of the highest labor costs in the world can’t help either. The minimum wage is $17 per hour with free health care.

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Mark Ferguson July 6, 2014 at 4:29 pm

$17 dollars am hour minimum wage is crazy to me! Thank you for the Info.

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Grace July 6, 2014 at 6:21 am

Hi Mark,

I had investment property in Melbourne because I finished my college education and lived there for 12 years. You are right, it is crazy expensive and pretty unattractive in terms of returns. Why anyone would want to invest there, I think, would be for negative gearing as we did – our rental payments are lower than our mortgage which can be used to offset against our personal income tax and that amount can be carried over for an indefinite period. However, it became clear to us that we would not return there to work, we sold off our houses to focus on other countries with better returns. Interest rates are not low compared to the USA, when we lived there, mortgage rates were as high as 12% but now they are hovering about 6%. People starting out find it hard to afford housing and thus, many of my Aussie and Kiwi mates are looking for opportunities in the USA. There are groups that do tours into the USA yearly and it is fun to join them because I got to go to places that I would not have dared to venture on my own. (like the Bakken Oil fields in North Dakota)

However, the Aussie government does have protective restrictions from foreign investors so that the locals are not priced out of the market. This was about 10 years ago and it could have changed since we pulled out from the country, I am not sure. They have “rankings” for homes like A,B.C where foreigners are only allowed to buy the B and C type properties. The B and C type properties were high density buildings, usually bought off a plan (before being built) or in less desirable locations. There are loopholes in this restriction though because wealthy foreigners can apply for a permanent residency or a green card, then they will not be subject to these restrictions. That is what has been happening to Australia in the last 15 years.

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Mark Ferguson July 6, 2014 at 4:32 pm

Hi Grace, thy article I linked too said they have restrictions on foreign purchase, but te government signs off on every application donor doesn’t have any effect. Thank you for the additional insight.

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Jesse July 6, 2014 at 6:31 am

As an expat living in Australia I can attest that the housing market is crazy here. I believe their are some major tax breaks associated with owning rental property. The Aussies also believe property only goes up, but insist it is different then the bubble portions of the US experienced, quite interesting when you can have many of the same convos we used to have in the early to mid 2000′s.

The rents you show are weekly rates as rent here is done by the week, but the ratios are still really bad. If you want to get an hour outside a city you can get ratios closer to 0.005.

The more interesting thing I find is the property management. They perform strict quarterly inspections on the property, are really good about ignoring repair requests, and have incredibly strict final cleaning standards. It is nice the bond is held in a government controlled account with standardized rules on withholding and returning it, in Western Australia anyways.

Cheers

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Mark Ferguson July 7, 2014 at 12:35 am

Thank you Jesse, I was wondering how rents could be that low! That makes more sense.

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Engelo Rumora July 6, 2014 at 8:04 am

Hi Mark,

Aussie Aussie Aussie lollol

Thanks for your blog post.

The not sustainable growth of the Australian Real Estate market is one of the main reasons why I moved to the US 2 years ago and started building my portfolio here.

Cashflow properties are pretty much non-existent and most investors invest based on hope that the properties they are buying will go up in value more than what there annual mortgage shortfall is.

It is starting to become stupidly unaffordable with both rents and prices.

I don’t think we will see a crash like what happened in the US but if China stops this mineral buying craze you never know.

I hope it does as I one day plan on returning back home to Sydney and know NSW like my back pocket.

It would be a dream come true picking up deals there similar to the prices here in the US.

Thanks for reading and have a great day.

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Mark Ferguson July 7, 2014 at 12:37 am

Thank you for te comment Engelo! I doubt we will ever see prices in AU or US like we did four years ago. I think there are too many investors waiting for deals now.

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James Hiddle July 6, 2014 at 11:42 am

“The government pumping a lot of money into first time home owner programs so that people can buy houses and the government is keeping interest rates extremely low”

Hmmm sounds like what happened here with those stinking ARM’s.

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Mark Ferguson July 7, 2014 at 12:39 am

James, the government doesn’t have anything to do with ARMs, but they do support FHA loans that allow lower down payments. I Allen to love ARMs.

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Dave Tanner July 8, 2014 at 3:17 pm

Stinking ARMS? I still have 3, they have only gone down. They now sit at their minimum of 3.25% now and have been for a year or 2. They can go up 2% per yr with max of 6% increase over the life of the loan (max of 9.25%). These properties will still cash flow well at the max because I had a 20% down payment, and rents have gone up. Scary for some, but they’ve been good to me. I don’t think they are the problem some have made them out to be.

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Marvin Song July 8, 2014 at 11:32 am

Hi Mark,

Thanks for the interesting blog! I lived in NZ for 12 years before moving to US 5 years ago so it’s definitely interesting to hear stories on those markets.

Just so that your readers have the accurate perspective, I wanted to point out that the rents in AU and NZ are normally “weekly” rather than “monthly” so I assume the median rent you mentioned above is “weekly” i.e. see the article “http://sydneymovingguide.com/the-cost-of-living-in-sydney/”. The ratio is still extremely low compared to here but I just wanted to throw out there.

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