Australian Real Estate Bubble?

Discussion in 'Property Market Economics' started by Norak Bastiat, 27th Oct, 2007.

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  1. crc_error

    crc_error The Rule of 72

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    I personally have a view houses are better than units. I had 3 properties, 2 were units, 3rd a house.. I made a killing on the house, but the units didn't do much for me. Plus with units you pay out body corp and are limited to the improvements you can make on your IP.

    check out domain.com and look at the suburb profiles to get a idea on the long term capital growth in the suburbs your interested. Then try to buy in a suburb which say the next suburb has had a boom, and its not yet filtered into your suburb of interest. Then look for things you feel will improve the suburbs value.. ie developments, etc. and the IP offering land banking opporunity, subdivision, renovations etc..
     
  2. Jacque

    Jacque Jacque Parker Premium Member

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    Up to $500K is challenging for freestanding housing, as it's not only below the current median but is restricted to outer suburbs. This doesn't of course necessarily mean that they are poor areas in which to invest- quite the contrary, as I believe there's some great value suburbs which are currently undervalued, when compared to their wealthier and higher median neighbours. You do need, however, to be prepared to dig a little deeper and research the better areas within the suburbs, as not all are created "equal" :D

    I wouldn't necessarily agree that a house ALWAYS provides better growth, but generally, over an average period of time, cap growth rates demonstrate that YES housing cg rates are generally higher by approx 2%

    Well located units, however, particularly those in sought after areas with some aspect of appeal (smaller blocks, proximity to infrastructure such as transport, schooling, shops, quiet streets, easy entrance to unit front door etc) can perform very well and exceed the housing growth of nearby or similar suburbs. Scarcity also plays a part in demand, and some units are more popular as they're amongst housing and so are more affordable.

    At the end of the day, the profile of the investor comes into play. If you're a passive investor and want a set and forget low maintenance IP then a unit may suit better. If you're a renovator/developer or ultimate control freak, then houses may be the way to go. It's a very individual thing :)

    Yields in Sydney are certainly increasing, after a long spell of drought, which indicates that it may just be a wise time to get back into this market. All disclaimers apply though naturally :) ;) Do your own research!!
     
    Last edited by a moderator: 6th Nov, 2007
  3. DaveJ__

    DaveJ__ Well-Known Member

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    I couldn't make an investment update but did get a phone call stating i could have a look at the DVD they used (PS from a MLB update)... For the low cost of $28. crc_error do you think the update was worth the $$?


    I assume this was PS you were 'quoting'? Pity ZFX dropped the Dividend and ALSO the franking credit... Will be interesting to see if it finds support
     
  4. tropic

    tropic Well-Known Member

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    I have to apologise that my questions are off topic.
    I hope I am not annoying anyone but I am interested to learn more about Sydney.

    I will consider myself a passive investor, I live in Perth so I want minimal problem with an IP. As Jacque mentioned units might suit me better.

    Is there a minimum size in sqm you would go for when looking for units?
    Will you consider Darlinghurst a good area to buy units?
    If the difference in CG between houses and units are only 2% then units might be the way to go since it's has lower maintenance cost and rent probably higher too (generally speaking)?

    A terrace style IP would be nice but I quess with 500K it wouldn't be close to the city?
     
  5. crc_error

    crc_error The Rule of 72

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    only $28? They charged me $48 to attend :mad: yes I think its worth th $28.. good information is always worth paying for.

    I got exercised the day before dividend, so I collected 50 cents in the capital gain (paid $17, exercise $17.50) and collected 67 cents for the call premium. I don't know why someone would exercise a call which still had 30 days to go! what a waste of theta. at least I miss out on paying 1 month worth of magin loan interest, but did miss the extra 70 div.. but who knows how low the stock will go now the dividend has been extracted. money in the pocket and a good result for 1 week trade.
     
  6. crc_error

    crc_error The Rule of 72

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    I would speak to the realestate agent and get a idea on what is renting in the area.

    Units may have lower maintaince, but they have body corp to pay and raise special levy's for maintaince purposes!
     
  7. Jacque

    Jacque Jacque Parker Premium Member

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    Don't fall into the trap of believing that units have lower maintenance costs- depending on the strata fees, they can vary quite widely.

    Forget a terrace under $500K in the East or inner city suburbs, unless it's an absolute bomb and needs major renovation works or demolition ;)
    A townhouse, however, might prove to be a good concession, but then again in the sub $500K price bracket these are going to be largely in the middle ring suburbs.
     
  8. 02bsure

    02bsure Well-Known Member

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    I think now is the time to withdraw from all leveraged investments whether they be involved in real estate, stocks or commodity exposure.

    I've lived in various locations over the last 20years (ie Dublin, London, Copenhagen, Stockholm, Cologne ...and of course Sydney) and the situation overall is looking dire indeed. I supppose the naivety of most Australians regarding their unyeilding belief in real estate and commodities is mainly due to permanent media porn.

    But just put things in perspective, avoid the noise and concentrate on the signal.

    We know there is
    - a global credit derivative issue of enormous proportions (over a trillion dollars).
    - a global stock market distortions due to carry trades and funny money (ie equity withdrawal into other investments)
    - a mind numbingly large global housing bubble (conventional lending norms will again become the order of the day once all is said and done, ie 3 X proveable annual income).
    - a precariously large bubble in China plus 20% inflation

    Stop and look at the chart of BHP for a moment and tell me commodities are not about to tumble heavily.

    BigCharts - QuickCharts

    Look at the Case-Shiller index for the US and understand what is coming

    Standard & Poor's - October 30, 2007: Historical Values

    Finally, understand that in every country I visit and know locals they all spout ,

    'its different here because < insert reason(s) > '


    Good luck.
     
  9. BillV

    BillV Well-Known Member

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    02bsure
    Can you explain your thinking please?
    Cheers
     
    Last edited by a moderator: 12th Nov, 2007
  10. 02bsure

    02bsure Well-Known Member

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    Let me distill it for you this way. Anyone under the age of 40 has been living in a dream world where they've only experienced bull markets. For myself I've concluded that everything that has occurred globally in financial markets since 1996 is likely to be lost before this correction finally concludes. I believe one of the biggest lies has been Australian real estate. From my experience Australians are the worlds most manic real estate speculators(and thats quite a title I assure you). I use the term speculators because thats what they are and should in no way be confused with investors who would always expect their investments to be safely cash flow positive. As such they will ultimately feel the brunt of serious pain over the next years.
     
  11. BillV

    BillV Well-Known Member

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    02bsure
    I will agree with you that our property holding costs are likely to increase.
    I will also agree on the "property speculators" comment but I dissagree on your expectation for cash flow positive properties in our capital cities.

    I guess the difference between other countries and Oz is that here our population is increasing and the new people moving here have to live somewhere. Additionaly our state governments don't want to provide housing so the Oz housing system is designed to be largely funded by individual investors.

    I don't know if you are aware but in recent times building activity has dropped to very low levels and we now have a situation where not enough houses are being built to house our population.

    Naturally this puts pressure on rents and on housing prices.

    Cheers
     
  12. 02bsure

    02bsure Well-Known Member

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    BV, I've heard the same immigration comment in England, Ireland, Denmark and in Spain its slightly different, there they say the population will keep booming and take up the slack in real estate because all the northen Europeans want to retire there.

    The reason investment property interest has dropped in Australia is simply because the yields make no sense. In other words, you can simply dump your cash in an account and get a far better return and without the hassle.
    The situation currently is highlighting the fact that all those who could afford a home already have one (or 5). What remains are the folks who either can't afford to buy or those who can but have decided not to.

    There is no shortage of housing in Australia. There is a shortage of affordable housing. There is no shortage of places to rent, there is only a shortage of places to rent to people on average incomes (less than 60K).

    I could go out tommorrow and rent any number of great places in sydney for over $500 a week... no problem. But most people can't and thats why they are all fighting eachother over anything thats available for under $400 a week.

    I must add that should I return to sydney I would relish renting a posh property and having the owner subsidise my existence to the tune of well over 50% on the cost of ownership.

    Just consider the fact that I could rent a nice terrace in Paddo for $600 and then consider the purchase price and its associated carrying costs. I'd be mad to buy it. I could live where I want and place my saved living costs in a high return account and still have a packet left over.

    Back to rents, rents have been a screaming bargain for years and only now are they increasing and only in the lower rental brackets where as I explained, average people are having to comete over a small supply. On one is going to wave a magic wand and grant these people more income and time soon so the belief that rents will go higher and higher is ludicrous. There will come a point where htey simply have to leave the city.

    In any case, even with the rental increases the properties are still not even close to being CF+ (cas flow positive). When I last owned and rented out a house in Sydney it returned 8%.

    In summary, there is plenty of property just not priced correctly. There is a surge in renters and this surge will continue because more folks are both forcefully (forclosed) and willingly choosing to rent. WHY, because real estate is now a bad bet.
     
  13. Simon Hampel

    Simon Hampel Founder Staff Member

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    Actually - I'm not sure that is quite correct ... there are some broad areas of our major cities (specifically Sydney and Adelaide - which are the only cities I really pay attention to) where there is simply no rental stock available ... there are no (or very few) houses of any value to rent.

    Let's take the example of a 3 bedroom residence (whether it be a unit, townhouse or house) ... there are simply fewer of these properties available for rent as evidenced by the number of adverts in the papers or online.

    Demand for rentals of my properties in Adelaide (inner suburbs) has skyrocketed, and where I rent in Sydney (median property value > $1m), there are exactly four 3 br houses ($810pw, $800pw and $615pw) and only one 3 br townhouse ($600pw) available for rent - no units. This is an area with a large number of high rise unit blocks, so there are plenty of 3br units and townhouses out there ... normally you would expect to find a lot more available. The surrounding suburbs are similar in their lack of stock.

    This is just a normal part of the cycle and has the effect of driving up rents, which will improve yields, which will eventually make property more attractive for investors again - and the cycle will continue.
     
  14. MichaelW

    MichaelW Well-Known Member

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    Ahhh.....

    Hi O2bsure (cool handle by the way), so many counter-arguments, so little time... :)

    Put simply, property is not a CF+ game its a growth game. If there's no projected growth (ever) then it becomes a cash flow game as that's your only return. Maybe short term growth will be constrained on property, though I disagree with that projection too for a myriad of reasons, but medium to long term property will definately outperform cash.

    Here's the 2 second simple numbers for you then I'll sign off:

    I have $40K cash.

    1) Put it in ING earning 7% pa gives me a return of $2,800 in 1 year or a total return of 7% pa gross.

    2) Buy a ho hum property for $200K using that $40K as 20% down. Lets call it a townhouse in Logan QLD which has been doing 10% - 20% returns pa for the last few years. But for simplicities sake I'll argue only 7% growth as that's ludicrously low so can't really be argued. QLD is back in to double digits and will probably hold there for the next 3-5 years.

    I rent it at a crappy 5% yield, which Logan also pulls. Actually lets assume a Sydney 3% yield on that Logan townhouse too just so my numbers are unassailably ridiculously conservative.

    So my return is $6K in rent (3%) and $14K (7%) in growth. $20K in total.

    My costs are at 7.5% (mortgage rate), lets call it 8% if you didn't use a mortgage broker. So, that's $12,800 in total interest bill (on $160K mortgage), lets call it $13K.

    Making my net return $20K - $13K = $7K plus I get to add back my negative gearing deductions. On this one it would be $13K interest plus $5K depreciation less $6K rent = $12K tax deduction. At 30% that's another $4K

    So, side by side:

    1) I make $7K gross which is taxed down to $4K net in ING;
    2) I pay $2K in cash flow ($13K interest - $6K rent - $5K tax return), but I get a growth return of $14K in the lean years. Net return of $12K.

    So, $4K if its cash or $12K if its in a dodgy IP with conservative numbers. Or, in other words, triple the return on cash at a 7% rate.

    I'll take the $12K and roll the dice for more in the good years thanks. But hey, we need renters, so don't do as I do, do what you do!

    Cheers,
    Michael.
     
  15. coopranos

    coopranos Well-Known Member

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    Guys I honestly wouldnt even bother trying to have this debate with this o2bsure guy.
    I think you will find it a waste of your time.
    He is perfectly entitled to have his own opinion, as the rest of us are, but this one can have no resolution. You wont convice him of the virtues of property investment, and he wont convince you of the virtue of...actually I cant work out what he is pushing, that everyone should keep their money in the bank..?
    Like any doomsayer, eventually he will be proven correct to some degree (people were saying the same thing and then claimed the Sydney correction a few years back was the beginning of the end). Even a dead clock is right twice a day.

    I hope his strategy of renting and putting his money in the bank pays off for him, however I personally prefer the conversation on this board to be discussion and debate about proactively planning for the future, rather than people wearing sandwich boards emblazoned with "The end is Nigh"
     
  16. crc_error

    crc_error The Rule of 72

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    Looks like the government didn't tell the RBA to stick to gov policy..
     
  17. crc_error

    crc_error The Rule of 72

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    I don't think you will be better off putting your money into a ING.. as you can't gear ING, and you have to pay tax on all its interest!
     
  18. coopranos

    coopranos Well-Known Member

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    Does anyone have details of average household wages vs average property prices over the last 30 years or so?
    Surely this would be the best thing to look at when people start screaming bubble.
     
  19. crc_error

    crc_error The Rule of 72

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    I don't have the figures on hand, but just asking my parents and other older people... a house in St Kilda used to be 3 years wage... now its like 12 years wage..
     
  20. samaka

    samaka Well-Known Member

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    Even if you could gear - the interest on the loan is greater than the return on the investment.