The Wrong Type of Boom

There's a few threads about growth happening a various places - Inner Melb, Bris, etc. Some are calling them booms.

IMO there are 2 types of boom -

• momentum driven booms - there's a little bit of growth, so people get the 'gotta buy now or get left behind' mindset.
• fundamental driven booms - when yields are relatively high, other asset classes are poor value, lots of IP 'bargains' around, sentiment towards housing is poor, IR low, etc.

In 2000 we had the latter. Right now I don't see good fundamentals, so this is more likely to be a momentum driven boom.

Fundamental booms are pretty safe booms to invest in as there are good reasons to buy - IPs just about pay for themselves from day one, it's a buyers market, lots of listings. Investors are more predominent in this sort of boom.These booms are sustainable for as long as IP remains good value.

Sentiment driven booms are riskier because there's often no reason to buy except that others are buying. These booms are driven by OOs who don't care much about fundamentals. Currently, wages are high, there's pent up demand from OOs who have saved a deposit over the last 5 yrs, rents are increasing so some renters have hit the tipping point of the rent or own decision, and some perceive that they missed the last boom & want to buy into this one ASAP. These booms are sustainable for as long as OOs are prepared to bid up prices.

Keep an eye on the investor finance figures, talk to REAs about who's buying and watch fixed rates.

So there may be localised booms happening, but are they the right sort of booms & how sustainable are they ?

Agreed.

MC

There has been a lot of talk on the forum lately about the percieved booms happening off the back of the largest boom witnessed. Everybodies talking about if it is the right time to buy or not, will prices rise/fall, etc.

However, looking at things in the long term it doesn't matter when you buy, even if buying in a false boom. As long as you hold your property long enough (7yrs or so) then it shouldn't matter when you buy as CG would've done its thing. I say get your foot in the door as quick as you can and hold - but saying this don't pay more than what the value of the property is worth in the current market of purchase.

I'm pleased you bought this up. Keithj though
I would have thought that it was a fundamental to buy based on sound fundamentals in any time through the property cycles. The herd will do what the herd will do.
I think this wholistic concept of the property market is an elusion and it is more down to solid fundamentals on an individual case by case basis.
Cheers
Simon

Hi Keith

Nice analysis, though I'm not sure if I agree with your conclusions.

If I may....

I believe it would be fair to say that the following areas are predominantly owner-occupied - Point Piper (Sydney), Toorak (Melbourne), Wategos Beach (Byron Bay) (Sorry, I don't know any of the expensive burbs in the other capitals)

You say that OO demand is riskier because it's not based on fundamentals.

I'd say that OO demand is less risky because it is based on where people want to live - and these are people who can afford it.

A good property in any of those areas will set you back millions (refer to this one for $16m in Wategos Beach)

And just a week or so ago, it was reported that Steve Vizard sold his Toorak mansion for $18m, setting a new record for Melbourne.

At those sorts of prices, they're not IPs for anyone.

Basically, homes in these sorts of areas are trophies for people for whom money is no object.

And that's why they cost what they do and, imho, will continue to only further increase in value at high rates of CG.

Imho, no fundamental driven boom will ever be able to compete with the long term affects of ego and status.

I'm not saying that as investors we ought to buy up Toorak, Wategos Beach, and Point Piper.

But I am saying that the emotional element (even if it is only ego) attached to owner-occupied dwellings is a powerful force and as investors we should not ignore it.

Indeed, investors don't ignore it as they are frequently advised to not buy in areas where IPs dominate. Quite aside from the fact that it means you have to compete more for tenants, the rationale is that it is owner-occupiers are generally held to take greater pride in their home than tenants.

So in areas with more OOs, you have better kept houses, And, other things being equal, that means a better quality suburb and, invariably, higher prices.

You drive through any town or city of any size and it is plainly evident.

M

keithj said:

but are they the right sort of booms

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Right sort for who?

All depends on ones investment strategy. For example a long term buy & hold, never sell strategy, any type of boom thats been categorized here will always be a good boom.

So whether its right or wrong only the individuals investment perspective will ever dictate which one it is for them.

I had been concerned about how much higher Brisbane prices could move earlier this year too.

However, I decided fundamentals may change significantly:

- household mix won't necessarily stay the same (possibly more share houses or three generations under one roof),

- projected population growth of 40% over the next 20 years should push a lot of lower income earners further out of Brisbane. Thus median income will increase significantly across many Brisbane suburbs.

- this popn increase will lead to further zoning relaxation.

- add to that transport changes (congestion and attempts to relieve it) and other infrastructure changes associated with significant popn growth, and I am confident there is comfortable growth in strategic locales.

and of course do we even want a boom? it aint good for OO's, it's no good for the city as a whole, it's no good for investors that want to increase their exposure. It's only good for investors that want to reduce their portfolio or OO's that want to downsize, governments wanting to increase their tax take and the industries that feed off real estate e.g. banks, REAs, lawyers and settlement agents.

CashflowPlus said:

There has been a lot of talk on the forum lately about the percieved booms happening off the back of the largest boom witnessed. Everybodies talking about if it is the right time to buy or not, will prices rise/fall, etc.

However, looking at things in the long term it doesn't matter when you buy, even if buying in a false boom. As long as you hold your property long enough (7yrs or so) then it shouldn't matter when you buy as CG would've done its thing. I say get your foot in the door as quick as you can and hold - but saying this don't pay more than what the value of the property is worth in the current market of purchase.

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Hi CF+, Agreed - IP is always a good long term investment. However, I'm a market timer....

simonjulie said:

I'm pleased you bought this up. Keithj though
I would have thought that it was a fundamental to buy based on sound fundamentals in any time through the property cycles. The herd will do what the herd will do.
I think this wholistic concept of the property market is an elusion and it is more down to solid fundamentals on an individual case by case basis.

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Hi Simon, Agreed - I'm a big picture person. I'd argue that there are a lot more fundamentally good value IPs out there at the right time in the cycle. ATM it's v. hard (for the lazy) to find them.

Pitt St said:

Nice analysis, though I'm not sure if I agree with your conclusions.

If I may....

I believe it would be fair to say that the following areas are predominantly owner-occupied - Point Piper (Sydney), Toorak (Melbourne), Wategos Beach (Byron Bay) (Sorry, I don't know any of the expensive burbs in the other capitals)

You say that OO demand is riskier because it's not based on fundamentals.

I'd say that OO demand is less risky because it is based on where people want to live - and these are people who can afford it.

A good property in any of those areas will set you back millions (refer to this one for $16m in Wategos Beach)

And just a week or so ago, it was reported that Steve Vizard sold his Toorak mansion for $18m, setting a new record for Melbourne.

At those sorts of prices, they're not IPs for anyone.

Basically, homes in these sorts of areas are trophies for people for whom money is no object.

And that's why they cost what they do and, imho, will continue to only further increase in value at high rates of CG.

Imho, no fundamental driven boom will ever be able to compete with the long term affects of ego and status.

I'm not saying that as investors we ought to buy up Toorak, Wategos Beach, and Point Piper.

But I am saying that the emotional element (even if it is only ego) attached to owner-occupied dwellings is a powerful force and as investors we should not ignore it.

Indeed, investors don't ignore it as they are frequently advised to buy in areas where IPs dominate. Quite aside from the fact that it means you have to compete more for tenants, the rationale is that owner-occupiers are generally held to take greater pride in their home than tenants.

And, other things being equal, that means a better quality suburb and, invariably, higher prices.

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Hi Mark,

I agree with you regarding the quality/top end of the market that you mention - OOs will always be a majority and usually pay cash - they will take low risks. There are few investors in that market because of the poor fundamentals & high barriers to entry.

I believe most investors (especially here) will be looking to the middle to low quality bands. The risks of IP are many. The big ones are holding costs and growth.

Holding Costs.
ATM holding costs for quality IP are high, for medium & low quality they are only a little more reasonable. A couple of IR hikes could increase the risks of holding beyond the pain threshold & force fire sales.

A fundamentally based boom is preceeded by high yields, low IRs, fire sales - buyer market,... So holding costs are relatively low. They can be held through IR hikes.
With low holding costs it's possible to buy more IP.

Growth
There are 2 types of investor - there's the buy when you can afford it school & the value/fundamental investors. The 1st type & the OOs are always buying - they're a constant. Fundamentally based booms happen after the value investors join in to give critical mass to the demand side. Without this group there's less chance for a boom to be sustained.
Of course a fundamentally based boom is likely to turn into a sentiment based one when prices overshoot.


For me there has to be a reason for growth. If the reason is it costs me nothing then fine.... if the only reason is that other people are buying, then I start to think of the greater fool theory (those fools being mostly OOs). This isn't an especially valid analagy, as in the long term IP investment shows that no-one is a fool.

I've bought some crap IPs in the past, I've learnt that quality (middle band) IP is the way to go. But it's got to be quality at the right price.

And I'm not trying to say - don't buy quality IPs ATM either. I'm saying there's a greater margin of safety ((c)W.Buffet) when buying into certain types of boom.

Cheers Keith

Good booms: When I am making money

Bad booms: Booms where other people are making money.

Good booms by definition are sustainable and likely not to end.. Hence the present boom is Brisbane is pure and natural and based on solid ground.

I simply don't buy the "2 types of booms" idea.

A "boom based on fundamentals" is a product of post-boom rationalisation.

keithj said:

Sentiment driven booms are riskier because there's often no reason to buy except that others are buying. These booms are driven by OOs who don't care much about fundamentals. Currently, wages are high, there's pent up demand from OOs who have saved a deposit over the last 5 yrs, rents are increasing so some renters have hit the tipping point of the rent or own decision, and some perceive that they missed the last boom & want to buy into this one ASAP. These booms are sustainable for as long as OOs are prepared to bid up prices.

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High wages
Increasing yields
Pent up demand
Positive sentiment

I could add low unemplyoment, increasing immigration, increase natural pop growth etc

Sorry but I think those are some fundamental factors.

I too think the momentum v fundamental boom thing is just after the fact justification. How do you know whether a boom was a momentum boom or a fundamental boom? Only after the fact: by observing whether it busts. In any case, most booms have two phases: the fundamental boom at the start and the momentum boom at the end. If it was always a fundamental boom it would never bust.
Alex

Twitch said:

High wages
Increasing yields
Pent up demand
Positive sentiment

I could add low unemplyoment, increasing immigration, increase natural pop growth etc

Sorry but I think those are some fundamental factors.

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Hi Twitch,

When I said fundamental driven booms, I should probably have said value driven booms. In my first post I said...

keithj said:

fundamental driven booms - when yields are relatively high, other asset classes are poor value, lots of IP 'bargains' around, sentiment towards housing is poor, IR low, etc.

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I agree that all the things you mention above are fundamentals. However, they are mostly universal - if they were the main drivers of the boom then all Oz would be booming & not just a few localities.

alexlee said:

I too think the momentum v fundamental boom thing is just after the fact justification. How do you know whether a boom was a momentum boom or a fundamental boom? Only after the fact: by observing whether it busts. In any case, most booms have two phases: the fundamental boom at the start and the momentum boom at the end. If it was always a fundamental boom it would never bust.
Alex

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Hi Alex,

As I said above - it's easy to define a value driven boom before the fact - buyers market, relatively high yields, fire sales, poor sentiment, long listing times. The bust is irrelevant, they all bust eventually.

And I agree that booms morph.....

keithj said:

Of course a fundamentally based boom is likely to turn into a sentiment based one when prices overshoot.

Click to expand...

Cheers Keith

keithj said:

Hi Alex,

As I said above - it's easy to define a value driven boom before the fact - buyers market, relatively high yields, fire sales, poor sentiment, long listing times. The bust is irrelevant, they all bust eventually.

And I agree that booms morph.....

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My take would be that fundamental booms are really just the market 'catching up' with the fundamentals. i.e. a fundamental boom should follow a momentum BUST (the last bust overshooting and sentiment not returning even though the fundamentals say it should).

i.e. if the boom is purely fundamental, it won't bust. The reason there ARE busts is that the boom becomes momentum at the final phases. Also remember that the degree of the momentum boom at the end (especially as reflected in, say, consumption from loans made on the basis of momentum-market based valuations) will affect just how bad the bust is. That will determine how bad the spillover a market (share, property, etc) bust will have on the real economy.
Alex

I'd be guessing that these two are the wrong sort of booms

(sorry for getting off topic...)

alexlee said:

My take would be that fundamental booms are really just the market 'catching up' with the fundamentals. i.e. a fundamental boom should follow a momentum BUST (the last bust overshooting and sentiment not returning even though the fundamentals say it should).

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Absolutely. I'd add that AFAIK the current localised momentum booms haven't been preceeded by good value fundamentals.

alexlee said:

i.e. if the boom is purely fundamental, it won't bust. The reason there ARE busts is that the boom becomes momentum at the final phases. Also remember that the degree of the momentum boom at the end (especially as reflected in, say, consumption from loans made on the basis of momentum-market based valuations) will affect just how bad the bust is. That will determine how bad the spillover a market (share, property, etc) bust will have on the real economy.

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Agreed. Although I think the majority of booms (shares, IP, Gold, DotCom) end up driven by sentiment. Maybe the ones that don't aren't newsworthy enough........

keithj said:

There's a few threads about growth happening a various places - Inner Melb, Bris, etc. Some are calling them booms.

Sentiment driven booms are riskier because there's often no reason to buy except that others are buying. These booms are driven by OOs who don't care much about fundamentals. Currently, wages are high, there's pent up demand from OOs who have saved a deposit over the last 5 yrs, rents are increasing so some renters have hit the tipping point of the rent or own decision, and some perceive that they missed the last boom & want to buy into this one ASAP. These booms are sustainable for as long as OOs are prepared to bid up prices.

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Hi Keith,

I find the discussion pertaining to two types of booms very interesting. I appreciate the views of experienced and successful investors who have been through a number of market conditions.

I have been watching the inner Melbourne market closely lately with the view of purchasing another IP. I am interested in observing the demographics of the people who inspect the properties in my targeted areas. In these areas the primary demographics are people who are in their mid 20's to early 30's. They are primarily OO's. I have been particularly interested to observe that in certain areas there can be as many as 100 people attend an inspection, whereas in other areas, which are still very close to the city there are very few.

From these observations I do believe that there are certainly OO's rather than property investors pushing the market up in the inner city. We have had a 'Goldilocks' economy for a while now which has enabled people to build up savings to put towards a property in an area they would like to live. At this stage the trend seems to favour the inner suburban and bayside areas. It will be interesting to see what happens to the values of these areas when the economy is not as strong.

Most of the advice relating to investing in residential properties at the moment is to buy in the inner and bayside areas. This opinion is expessed because these are the areas that are most in demand with many OO's, and therefore, in the opinion of the experts, will continue to see long term sustained capital growth.

I guess time will tell, and the extent of sustained growth in the inner areas will depend on a number of economic factors in the future.

Regards Jason.

keithj said:

Fundamentally based booms happen after the value investors join in to give critical mass to the demand side. Without this group there's less chance for a boom to be sustained.

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At this point in time, won't you as a value investor be competing against all the other value investors + buy whenevers + OO's + 'mums & dads' + random speculators + interstate/overseas investors - trying to get a prime blue chip property, most likely at auction?

My concern is waiting for this time and not being able to get the best properties in the best locations in the best suburbs at 'below market value' due to the significantly increased demand and competition at this time.

That's why I am buying in these suburbs now, though granted the holding costs may be higher and I may be waiting longer for more significant CG.

Regardless of where you are in the cycle, won't the best located properties in the best suburbs always be in demand?

If I was investing in middle/outer suburbs I would be more inclined to wait until these 'fundamentals' improve, but in inner/bayside areas where the so called 'ripple effect' first commences I wouldn't.

GSJ

alexlee said:

My take would be that fundamental booms are really just the market 'catching up' with the fundamentals. i.e. a fundamental boom should follow a momentum BUST (the last bust overshooting and sentiment not returning even though the fundamentals say it should).

i.e. if the boom is purely fundamental, it won't bust. The reason there ARE busts is that the boom becomes momentum at the final phases. Also remember that the degree of the momentum boom at the end (especially as reflected in, say, consumption from loans made on the basis of momentum-market based valuations) will affect just how bad the bust is. That will determine how bad the spillover a market (share, property, etc) bust will have on the real economy.
Alex

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Bravo to you Alex. I've just been inspired by your current real life story told in this thread, whatta journey!
Anyway, I'll be looking forward to learning from your posts on this forum. Cheers!