The future of Australian property prices

Value Collector · 27 February 2014

sydboy007 said:
then explain the below graph, or is interest something else than a cost??

Including the cost of interest muddies the water, because its assuming that the property is leveraged.

and if you have leverage you have to work out the leveraged return, which is probably going to be massive in the last 10 years or so.

eg. if the person uses a puts in $20,000 to by a $200,000 property, and in 5 years it goes to $400,000. it would look like this.

$200,000 capital gain + $78,000 rent = $278,000 - $45,000 interest = $233,000 - $25,000 other costs = $208,000 total profit.

So the person got a $208,000 return on a $20,000 investment that's like a 1000% return.

So leverage can make the return super huge or super negative.

If your trying to workout whether property investment makes sense to begin with, work it out on an unleveraged basis, then decide if your willing to take the extra up and down risk by adding leverage.

To me Unleveraged property is a good investment to have in a mixed portfolio, or if you can't afford to be completely debt free, minimise the debt and have a plan to reduce it down asap.

tigerboi · 27 February 2014

Value Collector said:
Those costs wouldn't be deducted from your capital gain, you would have paid for them with the annual rent you were earning ( or saving if you lived in it)

I constantly see people make similar comments on this thread, its like everyone forgets to add in the rent.

As soon as somebody says they have made a $x capital gain, people say you have to factor in all the annual costs against that gain, but if your going to factor in those annual costs, then you have to add in the 100's of thousands of $$$ of rent earned over that time.

The grand mother had a life tenancy so she
Paid the rent & strata the last 20 years

qldfrog · 27 February 2014

Value Collector said:
Including the cost of interest muddies the water, because its assuming that the property is leveraged.

and if you have leverage you have to work out the leveraged return, which is probably going to be massive in the last 10 years or so.

eg. if the person uses a puts in $20,000 to by a $200,000 property, and in 5 years it goes to $400,000. it would look like this.

$200,000 capital gain + $78,000 rent = $278,000 - $45,000 interest = $233,000 - $25,000 other costs = $208,000 total profit.

So the person got a $208,000 return on a $20,000 investment that's like a 1000% return.

So leverage can make the return super huge or super negative.

If your trying to workout whether property investment makes sense to begin with, work it out on an unleveraged basis, then decide if your willing to take the extra up and down risk by adding leverage.

To me Unleveraged property is a good investment to have in a mixed portfolio, or if you can't afford to be completely debt free, minimise the debt and have a plan to reduce it down asap.

yes the property will be geared if not that amount would have been in a term deposit (or invested otherwise) and we can expect similar return so it need to be seen as geared (or using geared as a de facto opportunity cost)
in anycase, yes it can hardly have been a bad decision knowing all real estate jumped up the roof, to compare you need to do a proper $ in/out which will differ based on use, individual circumstances (tax braket etc);
Yes I believe RE in australia is overpriced, but I have a non geared IP on top of my own home (diversification);
all is not black and white...
if I had 10$ brokerage to see/buy IP. I would sell mine now...
But I live in the real world so this property will stay iirrespective of its valuation.
anyway, just my 0.2c opinion

sydboy007 · 27 February 2014

trainspotter said:
Oh really? Sept Qtr 1999 average rent was $230 per week for Sydney. There is 150k PLUS before I even begin to look further into this rash statement of yours. If housing is such a sh1te investment and there is no gain to be had WHY OH WHY is it SOOOOOOOOOOOOOOOO expensive and people are still making money out of it?

http://blog.rpdata.com/2012/12/negative-gearing-and-its-impact-on-the-housing-market/

P.S. Yes you can negative gear shares a swell !!

It's such a ****e investment because the income it produces is so poor. It's tulip mania. Those negative gearing need roughly 5% annual capital growth just to break even. Most people buying do so because of FOMO. I can't find the article from a few days ago but it asked investors the main reasons they were investing in property. Admittedly NG came down near the bottom, but yield didn't rate at all. Imagine that. Making an investment and having no concern about the actual yield or cashflow of the investment. To me that's speculation on capital growth, not investing.

Cut down on high LVR loans, capitalise NG loses to reduce CGT on sale, get the ACCC to investigate the land bankers and I can assure you the tulip mania will subside quite a bit. The fact that a transfer of wealth on that scale from the asset rich to renters is not politically palatable is prob the main reason it'll never happen.

--------------------

http://www.propertyobserver.com.au/...f-home-buyers-requirement-lists/2014022668064

The survey, of more than 1,000 home buyers, was undertaken by CommBank.

Of those looking to newly invest, 54% said that the motivation was that property “is the best way to invest my money”, while 30% cited low interest rates meaning it’s a good time to buy, with 27% pointing to retirement planning.

Wish I could find the article as it listed about 8 reasons

Value Collector · 27 February 2014

It's such a ****e investment because the income it produces is so poor.

Well, the income is not that bad, you'll get an inflation hedged 4% return, where both your capital and income will be protected as inflation reduces the value of cash. Off course you have to compare that return to other investments, but the control you have, the regular weekly payments and the safety are pretty good factors. A mixed portfolio of stocks will probably beat it, but is sure beats a term deposit, and the returns will be less lumpy.

Those negative gearing need roughly 5% annual capital growth just to break even.

Why is that? Interest rates are about 5% now, so the rent would be covering the majority! the neg cash flow wouldn't be 5%, especially if you have owned it a couple of years and done some rental increases.

Admittedly NG came down near the bottom, but yield didn't rate at all. Imagine that. Making an investment and having no concern about the actual yield or cashflow of the investment. To me that's speculation on capital growth, not investing

.

Do you think most people buying shares would answer dividends to a survey that asked reason for investment?
Look at the gold thread, plenty of people buying gold zero cash flow there, but yes, just like shares, property would have its fair share of speculators, but if they are not smart, they will lose, thats our concern.

Of those looking to newly invest, 54% said that the motivation was that property “is the best way to invest my money”, while 30% cited low interest rates meaning it’s a good time to buy, with 27% pointing to retirement planning.

Pretty standard answers, property is a good place to invest money, in my opinion its not suited to people with small capital bases though that have to take on huge debt, In my opinion you don't really want to get into property if you need a loan more than say 50%' unless you plan to clear it to that level fast.

I like having property in my portfolio,

Value Collector · 27 February 2014

but if they are not smart, they will lose, thats our concern

.

Sorry, that should have said " thats not our concern"

trainspotter · 28 February 2014

sydboy007 said:
It's such a ****e investment because the income it produces is so poor. It's tulip mania. Those negative gearing need roughly 5% annual capital growth just to break even. Most people buying do so because of FOMO. I can't find the article from a few days ago but it asked investors the main reasons they were investing in property. Admittedly NG came down near the bottom, but yield didn't rate at all. Imagine that. Making an investment and having no concern about the actual yield or cashflow of the investment. To me that's speculation on capital growth, not investing.

Sooooooooooo 13.8% capital growth for Sydney is a sh1te return? Better than interest from a bank surely?

http://www.abs.gov.au/ausstats/abs@.nsf/mf/6416.0

You are paraphrasing from nuptie investors who are "hoping" for a RoR at some stage cause their accountant or some financial guru has told them to do this.

I am talking about buying and selling property (off the plan/flip/set and forget whatever) or buying vacant land and building duplex's, units, townhouses etc TO MAKE MONEY !! Profit & Risk as well as contingencies as well as rates and taxes as well as interest component as well as management fees and strata fees as well as development costs blah blah blah blah blah AND STILL MAKE MONEY !! If it does not stack up THEN DON'T BUY IT !! Must have minimum 20% MINIMUM before I will even look at it.

Value Collector · 28 February 2014

sydboy007 said:
It's such a ****e investment because the income it produces is so poor.

trainspotter said:
Sooooooooooo 13.8% capital growth for Sydney is a sh1te return? Better than interest from a bank surely?

Even if we forget about capital growth, the return on property still beats cash at bank interest.

Say, we have $400,000 capital we want to put to work for a long time.

At the bank you will currently earn roughly 4% interest if you lock it away, But your $400,000 capital base will be eroded by inflation by roughly 3%. So you''ll end up paying roughly 25% of your bank interest in income tax and the other 75% of that interest you earned has to be added back onto the $400,000 capital base to maintain its earning power.

So term deposits and other cash investments basically only maintain the value, they have no net earnings.

However, if you put your $400,000 into a well bought property, you will earn roughly 4% after costs and you capital base should increase over time to at least match inflation and the income should also increase with inflation.
So you end up with an after tax and inflation real net cash flow of 3%,

Then on top of that, if the population grows, you should see some extra capital and income growth, which is pretty much assured of happening, but even if it doesn't, your still beating the cash return which is nothing.

trainspotter · 28 February 2014

Analysts are predicting growth to slow to around six per cent this year, when more people are likely to list their properties believing the market has reached its top.
For prices to fall 50 per cent, the intense buyer demand would have to essentially disappear. For this to happen, unemployment would need to soar, making masses of people unable to pay their mortgages and everyone else unable to buy their houses from them, even at discounted levels.
The aforementioned low interest rates, along with a strengthening world economy and a new attitude among Australians, who became cautious about over-borrowing after the GFC, mean that this is extremely unlikely

http://www.news.com.au/finance/real...-remain-in-place/story-fnd91nhy-1226833483949

It has started already !! 5000 jobs gone QANTAS, 900 jobs going at SENSIS, 1400 jobs gone at FORGE, Toyota and Holden leaving, Willimastown ship building (BAE Systems) rattling the tin ... WAKE UP !!

Julia · 28 February 2014

Value Collector said:
Even if we forget about capital growth, the return on property still beats cash at bank interest.

Say, we have $400,000 capital we want to put to work for a long time.

At the bank you will currently earn roughly 4% interest if you lock it away, But your $400,000 capital base will be eroded by inflation by roughly 3%. So you''ll end up paying roughly 25% of your bank interest in income tax and the other 75% of that interest you earned has to be added back onto the $400,000 capital base to maintain its earning power.

So term deposits and other cash investments basically only maintain the value, they have no net earnings.

However, if you put your $400,000 into a well bought property, you will earn roughly 4% after costs and you capital base should increase over time to at least match inflation and the income should also increase with inflation.
So you end up with an after tax and inflation real net cash flow of 3%,

Then on top of that, if the population grows, you should see some extra capital and income growth, which is pretty much assured of happening, but even if it doesn't, your still beating the cash return which is nothing.

A fair few positive assumptions in that summary. I'm sure there are areas where you can reasonably have such expectations. But if you'd bought in any number of regional Qld centres, say five years ago, your capital value would still be down by around 30% and you certainly wouldn't have seen any appreciation in rents.

Furthermore, if you wanted to get out, because of the above reality there are very few buyers.
And that's even with such low interest rates.

Does anyone know anything about a place called Calliope, apparently very close to Gladstone?
A friend of mine, academic with minimal financial experience, was sucked into going into a "Wealth Seminar" (the very name might have rung alarm bells!) and as a result has purchased a $460,000 "boutique" property, house on about 700sqm in a new subdivision in Calliope. When I asked what a boutique property was, he wasn't sure.

He has been so convinced that this property is going to so massively and rapidly increase in capital value that he probably won't even bother with putting tenants in. This largesse is apparently due to what he describes as all the huge investment which will keep on expanding in gas in the area.

I know nothing about the area and only vaguely about the gas exploration and production. If anyone can offer an informed view about what is likely to happen with this supa dupa investment, I'd be grateful.

galumay · 28 February 2014

Julia said:
If anyone can offer an informed view about what is likely to happen with this supa dupa investment, I'd be grateful.

Not sure about Calliope specifically, but values have fallen hard in the whole Gladstone area, mining, processing and exploration are all in a decline and the over inflated Gladstone market has suffered greatly, not only have values fallen but vacancy rates are up and rents are down by a lot.

I have a couple of friends with multiple negative gearing properties in that area who fell for the hype like your friend, they look like going under - no chance to service the debt and low clearance rates with falling values is a recipe for disaster.

sydboy007 · 28 February 2014

Value Collector said:
Even if we forget about capital growth, the return on property still beats cash at bank interest.

Say, we have $400,000 capital we want to put to work for a long time.

At the bank you will currently earn roughly 4% interest if you lock it away, But your $400,000 capital base will be eroded by inflation by roughly 3%. So you''ll end up paying roughly 25% of your bank interest in income tax and the other 75% of that interest you earned has to be added back onto the $400,000 capital base to maintain its earning power.

So term deposits and other cash investments basically only maintain the value, they have no net earnings.

However, if you put your $400,000 into a well bought property, you will earn roughly 4% after costs and you capital base should increase over time to at least match inflation and the income should also increase with inflation.
So you end up with an after tax and inflation real net cash flow of 3%,

Then on top of that, if the population grows, you should see some extra capital and income growth, which is pretty much assured of happening, but even if it doesn't, your still beating the cash return which is nothing.

Those assumptions may hold true over the medium to long term, though real house price growth has been nearly non existent for large parts of Australia over the last decade. Sydney is really only back to what it was in 2003 last year after you adjust for inflation.

Rents in a lot of areas are not rising at the inflation rate, but a lot of expenses are rising at or above CPI.

Considering 1 in 3 mortgages is interest only, 50% are going to investors, with many accepting a 4% yield while being geared at 80 or 90% is not a sustainable or rational market to me.

There are corporate ILBs offering 6-7% YTM for a CPI of 2.5%. They're cheaper to buy, cheaper to sell, nearly as convenient as shares to buy and sell, no holding costs.

If we hit recession, and with the CAPEX cliff really starting to bite it seems inevitable now, the tone of conversation in this thread will change markedly. No more assuming that property only ever goes up.

As Julia has said in the prior post, and I've seen it too, too many people get into proeprty without doing proper research. More fool them, but they are (anecdotally) such a significant share of the market it makes a mad rush for the exit when the economy turns down far more likely.

Yes, if you are smart / lucky enough to have little to no gearing on a well located property you'll probably do OK to quite good, but for a lot of "investors" that's NOT what they're buying. Ask any < 5 years investor in Gladstone, Docklands, parts of Perth, regional QLD, areas that were reliant on domestic tourism if they believe property only goes up and rents rise by a minimum of the CPI every year.

trainspotter · 28 February 2014

What is going on in Gladstone?

Curtis Island LNG

The engineering, procurement and construction of the three LNG plants on Curtis Island, which is accessible only by water, represents the greatest concentration of Bechtel projects anywhere in the world. The three liquified natural gas (LNG) projects sit side-by-side, with the first plant scheduled for completion in 2014.

The Curtis Island LNG projects each have joint procurement, human resources, travel, accounting, legal, and community relations teams servicing them. This ensures efficiency and a quality service to our clients, reducing costs and streamlining processes and procedures. We work closely with the community, clients, key stakeholders, and government representatives to ensure a positive social impact for the duration of these projects.

At the peak of construction, the workforce will be 8,800 strong. These projects are also delivering a range of training and upskilling programs for the workforce. Bechtel will intake 400 adult apprentices through the National Apprenticeships Program (NAP) to work on the three LNG projects.

http://www.bechtel.com/curtisisland_lng.html

The Wiggins Island Rail Project

The Wiggins Island Rail Project (WIRP) is the staged development of new rail lines and upgrading of existing lines to service the new Wiggins Island Coal Export Terminal (WICET) at the Port of Gladstone. WIRP will create a vital link between the new Wiggins Island Coal Terminal and mines in the southern Bowen and Surat Basins. It represents Aurizon’s commitment to the future growth of Queensland coal industry. This project will deliver a significant 30% increase in coal tonnage transported from the southern Bowen Basin by 2015.

http://www.aurizon.com.au/projects/wiggins-island-rail-project

80 billion dollars being spent over the next 7 years in Gladstone.

http://www.callioperealestate.com.au/buying/properties-for-sale/

Lotsa properties for sale in all different price brackets but a large number around the 400k mark. 20 kms SSW of Gladstone does not excite me. Would not have bought unless I had a guaranteed rental agreement in place for 3 x 3 with a 3 year option (GEHA or DHA) IMO Looks a bit too dense for my liking with similar houses being built by the same builder.

Sorry Julia I would have to say that this looks like a set and forget property that is not going to jump 20% in the next few years. It would appear that the market in the area has been saturated with too much of a good thing. Plenty of reasons to get frothy about with the infrastructure etc but the long term prognosis of a 10 year plan should see your academic friend recoup most of his/her hard earned. $460,000 also seems a lot for a "boutique" house and land package in the boondocks. Just my opinion of course and could be totally wrong

qldfrog · 28 February 2014

about Gladstone: lend lease will not proceed with participation with abbott point Coal facility, and this is not the first of these bad news; I doubt Gladstone workforce will increase in the coming years as some of the projects are big but already engaged or decreasing:
as for after, none of these infrastructures employ many people:we are not building factories there, just a channel to export in an automated way our raw resources (I work in the mining industry in Brisbane so i have some decent knowledge there);
the house in calliope will be pure loss, as to why on hell would anyone want a suburban house 20km of town, surrounded by emptiness, For that price, I would get an acreage and a horse or two....

Value Collector · 28 February 2014

Julia said:
A fair few positive assumptions in that summary. I'm sure there are areas where you can reasonably have such expectations. But if you'd bought in any number of regional Qld centres, say five years ago, your capital value would still be down by around 30% and you certainly wouldn't have seen any appreciation in rents.

Furthermore, if you wanted to get out, because of the above reality there are very few buyers.
And that's even with such low interest rates.
.

Well i did say if you "bought well" you can give examples of people who have lost money in any investment vehicle.

I dont think i am using overly positive assumptions, all i have assumed is that you you can rent the property out, and over time the capital value and rent increases with inflation.

sydboy007 · 1 March 2014

http://www.idiottax.net/2014/02/oldies.html#.UxEIxfmSz-U

a bit of tongue in cheek reality

Value Collector · 1 March 2014

sydboy007 said:
http://www.idiottax.net/2014/02/oldies.html#.UxEIxfmSz-U

a bit of tongue in cheek reality

Makes sense to me, I wouldn't recommend older people keeping their homes till they die, as a minimum I would do some sort of reverse mortgage.

You have to be careful how early you start using it though, expenses can go through the roof later in life, But if you can trade down into something with less maintenance and end up with an extra few dollars in your pocket each week you should go for it.

I use my property portfolio for income now, but you can bet later in life when I need to I will be selling it off for the lump sums I need. its one of the benefits that people that own their own home have over those that never buy.

Julia · 1 March 2014

galumay said:
Not sure about Calliope specifically, but values have fallen hard in the whole Gladstone area, mining, processing and exploration are all in a decline and the over inflated Gladstone market has suffered greatly, not only have values fallen but vacancy rates are up and rents are down by a lot.

I have a couple of friends with multiple negative gearing properties in that area who fell for the hype like your friend, they look like going under - no chance to service the debt and low clearance rates with falling values is a recipe for disaster.

trainspotter said:
Lotsa properties for sale in all different price brackets but a large number around the 400k mark. 20 kms SSW of Gladstone does not excite me. Would not have bought unless I had a guaranteed rental agreement in place for 3 x 3 with a 3 year option (GEHA or DHA) IMO Looks a bit too dense for my liking with similar houses being built by the same builder.

Sorry Julia I would have to say that this looks like a set and forget property that is not going to jump 20% in the next few years. It would appear that the market in the area has been saturated with too much of a good thing. Plenty of reasons to get frothy about with the infrastructure etc but the long term prognosis of a 10 year plan should see your academic friend recoup most of his/her hard earned. $460,000 also seems a lot for a "boutique" house and land package in the boondocks. Just my opinion of course and could be totally wrong

qldfrog said:
about Gladstone: lend lease will not proceed with participation with abbott point Coal facility, and this is not the first of these bad news; I doubt Gladstone workforce will increase in the coming years as some of the projects are big but already engaged or decreasing:
as for after, none of these infrastructures employ many people:we are not building factories there, just a channel to export in an automated way our raw resources (I work in the mining industry in Brisbane so i have some decent knowledge there);
the house in calliope will be pure loss, as to why on hell would anyone want a suburban house 20km of town, surrounded by emptiness, For that price, I would get an acreage and a horse or two....

You've all confirmed my thoughts even without having known much about the extent of the infrastructure etc in the area.

He was planning to retire in three years - has used money from his Super to make this purchase. When I asked what the plan was if the property didn't appreciate as promised, he assured me that just 'couldn't happen'.
It is what it is. Silly bugger.
Thanks for the comments.

Julia · 1 March 2014

Adding to the above, his introduction to this was via a cold phone call, followed by the wealth seminar, attended by about 50 people, 10 of whom took up the sales pitch.

Company is Zenith Wealth Management Ltd which appears to have its origins in Malaysia. The actual (to be built) development in Calliope is called Cloudscape http://cloudscape-estate.com.au/about/gladstone/, and the building company is Tribeca Homes.

It's negatively geared, he says he has just paid about $4000 in 'the documentation stuff'. Interest rate of 4.9%.

When I asked if he'd run the idea by a financial adviser he said yes, but not the person who will actually be managing his super when he retires. When I asked why not, the response was that "well, he might be biased towards Super" (still thinks Super is some sort of specific thing in which to invest rather than simply a tax advantaged vehicle), so he used the Financial Adviser provided by the above 'wealth managers'.

Has anyone heard anything at all positive about either of the above organisations?
He's a really nice bloke, just naive, and I'm really sorry to see him being suckered if that's what is happening.

banco · 1 March 2014

Julia said:
Adding to the above, his introduction to this was via a cold phone call, followed by the wealth seminar, attended by about 50 people, 10 of whom took up the sales pitch.

Company is Zenith Wealth Management Ltd which appears to have its origins in Malaysia. The actual (to be built) development in Calliope is called Cloudscape http://cloudscape-estate.com.au/about/gladstone/, and the building company is Tribeca Homes.

It's negatively geared, he says he has just paid about $4000 in 'the documentation stuff'. Interest rate of 4.9%.

When I asked if he'd run the idea by a financial adviser he said yes, but not the person who will actually be managing his super when he retires. When I asked why not, the response was that "well, he might be biased towards Super" (still thinks Super is some sort of specific thing in which to invest rather than simply a tax advantaged vehicle), so he used the Financial Adviser provided by the above 'wealth managers'.

Has anyone heard anything at all positive about either of the above organisations?
He's a really nice bloke, just naive, and I'm really sorry to see him being suckered if that's what is happening.

I wait with bated breath for him to blame the lack of Government regulation when this all goes pear shape.

The future of Australian property prices

Value Collector

Have courage, and be kind.

tigerboi

qldfrog

sydboy007

Value Collector

Have courage, and be kind.

Value Collector

Have courage, and be kind.

trainspotter

Value Collector

Have courage, and be kind.

trainspotter

Julia

In Memoriam

galumay

learner

sydboy007

trainspotter

qldfrog

Value Collector

Have courage, and be kind.

sydboy007

Value Collector

Have courage, and be kind.

Julia

In Memoriam

Julia

In Memoriam

banco

Similar threads

The future of Australian property prices

Have courage, and be kind.

Have courage, and be kind.

Have courage, and be kind.

Have courage, and be kind.

In Memoriam

learner

Have courage, and be kind.

Have courage, and be kind.

In Memoriam

In Memoriam

Similar threads

Privacy & Transparency

Privacy & Transparency