The future of Australian property prices

[kid hustlr]

This scenario doesn't really cater for house prices dropping... Given you're highly leveraged, what about the case where your asset drops 5% in value? Or more? (Negative equity anyone?)

That's not to say house prices WILL drop, just that the scenario should be considered...

Yep agree, You could say the same for any investment choice although generally property has a higher level of leverage involved. It depends on your view of where the property market/your investment is heading I just think people are getting carried away. You don't need property prices to double every 7-10 to get a good return on your property.

If you're property drops 5% in value you've suffered a paper loss and little more unless you are forced to sell.

 

[matty77]

Not so concerned about any drop in property prices really as it will be PPOR for 4 to 5 years then I will just move somewhere else and buy another house and rent this one out.

Again I would hold the property long term, this one would be sold for my kids when they need some $ in about 22 years time. Hopefully I would have seen some capital gains in a 22 year period.

hmmm

 

[Klogg]

Not so concerned about any drop in property prices really as it will be PPOR for 4 to 5 years then I will just move somewhere else and buy another house and rent this one out.

Again I would hold the property long term, this one would be sold for my kids when they need some $ in about 22 years time. Hopefully I would have seen some capital gains in a 22 year period.

hmmm

If your holding period is that long, the question is not around the size of your loss, but rather maximizing your gains.

Stock volatility long term won't really hurt you... In fact, if I were in the situation you're in, I'd be buying an index over property (if I wanted a minimal effort investment)

But each to their own.

 

[FlyingFox]

Not really, I have met many but they are definitely not in the majority.


Smart, experienced investors understand that positive cash flow properties are generally not found close to the CBD and don't look for them there. It's all about cash flow, not capital gain. Some go the commercial property route to achieve this but it's higher risk.

You don't lose money unless you realize a loss by selling and even that is a capital loss credit. Your calculated net worth will decline if the value of your property porfolio does but like I said, positive cash flow property investors focus primarily on cash flow.



Quite a lot actually sit on negative cash flow property expecting value to rise to compensate on sale and this burden can sometimes force a sale. The only reason to sell a cash flow positive property is when someone wants to pay you an incredible price for it or your circumstances change and you need to cash out.

I think we are agreeing on the same things without explicitly saying it. Yes those with positive cash flow properties bought many moons ago have nothing to fear. Those with negative cash flow properties and those the purchased post GFC or even pre GFC stand to loose a fair bit.

Agree with you totally about positive cash flow. It is difficult to find but that is what a real investor should be looking for. Both my parents and inlaws have largish prop portfolios (overseas not in oz) and they have done this via positive cash flow and doing the numbers properly.

 

[FlyingFox]

This scenario doesn't really cater for house prices dropping... Given you're highly leveraged, what about the case where your asset drops 5% in value? Or more? (Negative equity anyone?)

That's not to say house prices WILL drop, just that the scenario should be considered...

+1. Also you really need to do the sums properly. For an apartment you are looking at outgoings of between 15-25%. This includes agents fees, rates, insurance and strata. Also take into account that when you sell you will be liable for agents and legal fees. When you buy you will be liable for stamp duty and legal fees.

 

[FlyingFox]

Yep agree, You could say the same for any investment choice although generally property has a higher level of leverage involved. It depends on your view of where the property market/your investment is heading I just think people are getting carried away. You don't need property prices to double every 7-10 to get a good return on your property.

If you're property drops 5% in value you've suffered a paper loss and little more unless you are forced to sell.

But you need continuous capital gains just to stay at square one. Yes the leverage works for you but the sword cuts both ways.

 

[FlyingFox]

If your holding period is that long, the question is not around the size of your loss, but rather maximizing your gains.

Exactly and because property cycles tend to be longer you can be in two completely different positions in 22 years time depending on when you bought/buy in.

One thing to keep in mind is that the baby boom and the years leading to the GFC (1960-2005) are unlike any other point in history. We had the quickest and largest population doubling EVER! These people have gone through the cycles and have accumulated wealth and increased demand. Than came the credit growth. I doubt this will ever happen in human history again.

 

[FlyingFox]

Not so concerned about any drop in property prices really as it will be PPOR for 4 to 5 years then I will just move somewhere else and buy another house and rent this one out.

Again I would hold the property long term, this one would be sold for my kids when they need some $ in about 22 years time. Hopefully I would have seen some capital gains in a 22 year period.

hmmm

Have a look at Melbourne and the market before you decide to buy. Especially an inner city apartment or new developments on the fringe.

 

[kid hustlr]

+1. Also you really need to do the sums properly. For an apartment you are looking at outgoings of between 15-25%. This includes agents fees, rates, insurance and strata. Also take into account that when you sell you will be liable for agents and legal fees. When you buy you will be liable for stamp duty and legal fees.

Re-read my post, i factored those in. I'm aware its a simple example.

But you need continuous capital gains just to stay at square one. Yes the leverage works for you but the sword cuts both ways.

True. Leverage is directly related to how much risk you are willing to take on.

I didn't say property investment is the only option but when you stack it against alternatives it stacks up way better than what you guys are implying. If you aren't willing to take on a calculated risk then what do you do? throw it an at call account and which will give you circa real 2% growth after inflation?

 

[FlyingFox]

Re-read my post, i factored those in. I'm aware its a simple example.

Add the fact that even at call rates, you will be getting ~ 3 K after tax (at 37%) for your 120K deposit and your loss is now ~6K. That is a 1% loss at todays low interest rates.

Add to this that you will need a 3-5% gain in five years (say you will sell in five) to cover the cost of real estate agents and stamp duty and your at 1.5-2% losses per year with a whopping 20% deposit.

True. Leverage is directly related to how much risk you are willing to take on.

I didn't say property investment is the only option but when you stack it against alternatives it stacks up way better than what you guys are implying. If you aren't willing to take on a calculated risk then what do you do? throw it an at call account and which will give you circa real 2% growth after inflation?

Ofcourse investing is a calculated risk. There are still some good properties out there and property investment is generally less risky than other forms. One thing you do need to factor though in todays markets is the capacity of prices to rise. By many accounts we are at the top or near the top of a cycle, not at the bottom or the middle.

 

[matty77]

Have a look at Melbourne and the market before you decide to buy. Especially an inner city apartment or new developments on the fringe.

Im flying to Melbourne this weekend to look around and suss out the property market a bit more. Still not sure if I will rent or buy!

Cant do apartments, needs to be a 3 bedroom house as I have kids! Also most apartments in Melbourne are 2 bedroom, and you pay through the nose on a 3 bedroom apartment in Melbourne.

Plus I want to secure land if possible, I feel Melbourne already has too many apartments around.

 

[Klogg]

Plus I want to secure land if possible, I feel Melbourne already has too many apartments around.

If I were in your position (not knowing your situation 100%), I'd look for a run-down house within the inner city, possibly with a fair bit of land.
Yarraville, Spotswood and Newport (I can mainly speak for the west) can have 600sqm blocks which can easily be subdivided and have 2-3townhouses put on them (there's atleast one in almost every street nowadays) and sold with very good margins.

Example:
600sqm in newport ~ 600k
Stamp duty + other costs = 50k
Plans/Building permits = 40k
Building costs ~250k each = 500k (4BR, 3Bath townhouse ~28squares)
Holding costs = 50k (roughly)
Total = 1240k
(Note: plenty of room for error in these builds - must be careful!)

Now keep in mind a 4BR townhouse down the road sold for 805k... and a 3BR for 730k (crappy layout TBH)

That is, ofcourse, if you're interested in these suburbs... and depending on what you can afford.

(and with all that in mind, my preference is still equities FYI)

 

[FlyingFox]

Im flying to Melbourne this weekend to look around and suss out the property market a bit more. Still not sure if I will rent or buy!

Cant do apartments, needs to be a 3 bedroom house as I have kids! Also most apartments in Melbourne are 2 bedroom, and you pay through the nose on a 3 bedroom apartment in Melbourne.

Plus I want to secure land if possible, I feel Melbourne already has too many apartments around.

Good idea. Will you be working in the city?

 

[matty77]

Good idea. Will you be working in the city?

Working around Tottenham area.

@ Klogg - probably looking for similar but $600k may be slightly out of my price range, although talking with ANZ today they have a nice fixed rate @ 4.99% for 3 years at the moment so I could probably stretch out to that...

Ideally I want an older house that I can give a lick of paint to and chuck a new kitchen in, tidy up the yard, new carpet etc. Do this over the next year to make good enough to live in for the next 4 years, then rent it out after that when I leave. Something like that anyway.,..

subdivision etc, that would be down the track - 15-20 years could look at that but not immediate as it will be PPOR, but eventually yes if there is opportunity and we have paid the house down enough.

 

[Trembling Hand]

Working around Tottenham area.

You poor thing!

 

[sydboy007]

Interesting article on macrobusiness today

Should set the highly geared chattering landlords into strident demands that the Government do something. Admittedly overall the profits from sales far outweighed the losses, but to be over 10% selling at a loss when we're not even technically in recession yet.

RP Data has today released its Pain & Gain Report for the March quarter of 2013, which reveals that 12.7% of all home which sold over the three months to March 2013 incurred a gross loss. This compares with a peak of 13.1% of re-sales recording a loss over the three months ending January 2013

RP Data recorded 58,677 residential property re-sales nationally over the first quarter, of these, 12.7 per cent recorded a gross loss from the original purchase price. The gross value of the losses associated with these loss making re-sales totalled $463.9 million over the quarter. Conversely, 87.3 per cent of all March quarter re-sales recorded a gross profit relative to their original purchase price. The gross profit from these re-sales equated to $9.6 billion.

 

[satanoperca]

Interesting article on macrobusiness today

Should set the highly geared chattering landlords into strident demands that the Government do something. Admittedly overall the profits from sales far outweighed the losses, but to be over 10% selling at a loss when we're not even technically in recession yet.

RP Data has today released its Pain & Gain Report for the March quarter of 2013, which reveals that 12.7% of all home which sold over the three months to March 2013 incurred a gross loss. This compares with a peak of 13.1% of re-sales recording a loss over the three months ending January 2013

RP Data recorded 58,677 residential property re-sales nationally over the first quarter, of these, 12.7 per cent recorded a gross loss from the original purchase price. The gross value of the losses associated with these loss making re-sales totalled $463.9 million over the quarter. Conversely, 87.3 per cent of all March quarter re-sales recorded a gross profit relative to their original purchase price. The gross profit from these re-sales equated to $9.6 billion.

You failed to mention that the calculations did not take into account, stamp duty and selling costs (agents fees) equating to another 6% of costs.

Also for homes purchased after Jan-2008 25% recorded a loss with another 32% recording a 0-10% profit. Now calculating in stamp duty and selling fees and this 32% would diminish to maybe 16% and the loss amount would increase to 41%. 41% of properties bought after Jan 2008 and sold before the end of the March quarter in 2013 recorded a loss.

Also, as it is impossible to collect any accurate data the holding costs, interest, rates, maintenance etc. Doesn't look like property is a win all the time, well certainly not in the last five years.

Finally a report which reflects a little more realistically about property as an investment. As a home, a whole different matter.

Cheers

 

[sydboy007]

Philip Soos has another great article on Business Spectator today

The property PE chart should be shown to any would be investor. Would anyone buy a company with a PE of 30? You'd REALLY have to believe in it's growth potential to pay such a high amount for a share of the profits.

As for gross yields, would be great to see what net yields for investment properties are like. Really makes pretty much any other kind of investment look good.

I'll ask again, why buy when someone is willing to lend to you at below cost.

 

[moXJO]

Philip Soos has another great article on Business Spectator today

The property PE chart should be shown to any would be investor. Would anyone buy a company with a PE of 30? You'd REALLY have to believe in it's growth potential to pay such a high amount for a share of the profits.

As for gross yields, would be great to see what net yields for investment properties are like. Really makes pretty much any other kind of investment look good.

I'll ask again, why buy when someone is willing to lend to you at below cost.

So now every house on the market would be considered to have a PE of 30. Are you lot running for dumb statements of the year or what.

 

[sydboy007]

So now every house on the market would be considered to have a PE of 30. Are you lot running for dumb statements of the year or what.

Most things in finance deal with averages and aggregate data.

I'd say a lot of investors are buying on a PE of around 30 these days.

Whatever the figure is, you'd have to be lucky to buy at a PE of say 14 these days.

From a purely financial perspective I just don't see the benefit of buying, especially since most people can only afford to buy in areas with poor public transport and generally long commute times to work.

I look at the shares i sold to buy my home in 1997. Those shares are all 8-13 times higher, and I have no idea how much the dividends would total to. My house is maybe 2.5 times increased in value, but then need to account for the purchase and holding costs.

Personally, I think I could be retired now if I'd not bought my house and had continued investing in shares for the last 16 years.