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A VERY interesting question...
- Thread starter steveadl
- Start date
It's FAR MORE warm and fuzzy if you've just sold out of a place that has shot up to a new record enormous price!!!!!
I think your middle road is wise. I keep promising to get out of here - will do so soon!
おつかれ！ YM
Another example of why I have always wanted to buy houses. I have been painting all week the house my parents bought in 1985 (so it is pre-capital gains). They paid $53K in Balmoral. It is an average brick 3 bedroom one bathroom, one car accom, nothing special. Balmoral has benefited from the fantastic Bulimba gentrification but even without this bonus, the house would be worth nearly what it is now, just a little less.
Ballpark valuation a few weeks ago was in the $600Ks. We are getting an appraisal in a few days now that it is freshly painted (nearly finished), new wardrobe doors, new lights and looks fresh and clean and trendy again.
So in 22 years this house has been painted inside two or three times, had a $5K kitchen eight years ago and about $2K for new bathroom which we did ourselves, hence the cheap price.
So $53K plus maximum $10K all up (being generous) and value now in the six hundreds. I am hopeless at working out yields etc, but this has way more than doubled every seven years. This is why holding long term is absolutely magic.
Wylie
Ballpark valuation a few weeks ago was in the $600Ks. We are getting an appraisal in a few days now that it is freshly painted (nearly finished), new wardrobe doors, new lights and looks fresh and clean and trendy again.
So in 22 years this house has been painted inside two or three times, had a $5K kitchen eight years ago and about $2K for new bathroom which we did ourselves, hence the cheap price.
So $53K plus maximum $10K all up (being generous) and value now in the six hundreds. I am hopeless at working out yields etc, but this has way more than doubled every seven years. This is why holding long term is absolutely magic.
Wylie
Hi Wylie. Try this site to work out compound annual return (CAR)
1985: 53k
2007: 600k
11.66% p/a
(72/11.66 = 6.18) So doubles every 6.18 years on those rough figures.
From the little I know of Balmoral I'm guessing it was ugly duckling when your parents bought and now it's just very close to the CBD property, excellent CAR anyhow.
I guess there were people in 1985 who would have been thinking that 53k was a lot of money and property couldn't possibly go much higher
Hi Wylie. Try this site to work out compound annual return (CAR)
1985: 53k
2007: 600k
11.66% p/a
(72/11.66 = 6.18) So doubles every 6.18 years on those rough figures.
From the little I know of Balmoral I'm guessing it was ugly duckling when your parents bought and now it's just very close to the CBD property, excellent CAR anyhow.
I guess there were people in 1985 who would have been thinking that 53k was a lot of money and property couldn't possibly go much higher
Absolutely!! I had just sold my first "live in myself" house for $56K one year later, so it was average, but not ugly duckling. It was bigger than my place in Morningside which was 7 squares so the market was obviously moving in 1985/86. Anyway, it was an average one bathroom, three bedroom house. It is still the same but freshly painted with new kitchen and bathroom. Many people would not want to live in it without an ensuite or study, but plenty of people who still need a roof over their heads.
All my life I have heard "they paid WHAT for that place", and "It will never go higher than that" etc etc etc. It ALWAYS has in the areas we buy, inner southern, eastern suburbs, and plenty of other places.
Wylie
Obviously at any given time across Australia in some cities or areas; the real estate market is rising with other areas falling in price or slowing down - it's simply a flow-on or transfer of money from one area to another. For example, the markets in Sydney & Melbourne were overheating around 2002/2003 & as a result of that a stack of investors went to Far North QLD & boughts heaps of property because you could buy a house for half the cost in those capital cities - therefore it became more affordable! Investors simply sought out cheaper & better value areas to invest in - increased yields & more potential for higher capital growth.
I've been reading API magazines about all the big investors with 10-20 houses & the majority of their buying was in 2002-2003 when the market was really affordable in those non-capital city areas.
If you think that the real estate market is going to keep on going at record figures, YOU'RE DREAMING!!! If property statistically based on the last 100 years or so doubles every 7-10 years, & the market goes up & down through that cycle, then obviously A CERTAIN AREA/CITY/STATE, etc is going to enjoy maybe 3-5 years of super growth (doubling to tripling of prices in that short time) followed by 5-7 years of depression where the property either went up every so slightly, prices remained stagnant, or dropped in value.
In Far North QLD, in 1994/1995 the RE market peaked; followed by 7-8 years of depression only to see super growth from 2002/2003 to now & still going. But arguably I think it will only rise for the next 2-3 years IMO & then slow/drop again.
EG: 1994/1995 Units in average area sold for $245,000 now 12 years later to present time those units should have doubled in value; however they have only regained their price - so obviously as we all know the suburb or area makes a big difference!! Like someone else said, imagine with the above example if I'd bought that property only to be waiting some 12 years later & my property STILL hasn't gone up in value. However I bought like others in 2003 at a depressed price (great price for me at only $99,000!) & in around 4 years the unit's now worth $230,000)
Anyway that's my view. Whilst I'm positive about the next 2-3 years, after that I'm not so sure. And when the market here falls in FNQ if I'm right in 3 years time; then obviously ANOTHER REAL ESTATE MARKET in another suburb/city, etc in Australia will be still affordable & so other investors would therefore stop investing where they are & seek out new areas that are cheaper with increased yields & more potential for higher capital growth; & so the transfer of money continues...
I've been reading API magazines about all the big investors with 10-20 houses & the majority of their buying was in 2002-2003 when the market was really affordable in those non-capital city areas.
If you think that the real estate market is going to keep on going at record figures, YOU'RE DREAMING!!! If property statistically based on the last 100 years or so doubles every 7-10 years, & the market goes up & down through that cycle, then obviously A CERTAIN AREA/CITY/STATE, etc is going to enjoy maybe 3-5 years of super growth (doubling to tripling of prices in that short time) followed by 5-7 years of depression where the property either went up every so slightly, prices remained stagnant, or dropped in value.
In Far North QLD, in 1994/1995 the RE market peaked; followed by 7-8 years of depression only to see super growth from 2002/2003 to now & still going. But arguably I think it will only rise for the next 2-3 years IMO & then slow/drop again.
EG: 1994/1995 Units in average area sold for $245,000 now 12 years later to present time those units should have doubled in value; however they have only regained their price - so obviously as we all know the suburb or area makes a big difference!! Like someone else said, imagine with the above example if I'd bought that property only to be waiting some 12 years later & my property STILL hasn't gone up in value. However I bought like others in 2003 at a depressed price (great price for me at only $99,000!) & in around 4 years the unit's now worth $230,000)
Anyway that's my view. Whilst I'm positive about the next 2-3 years, after that I'm not so sure. And when the market here falls in FNQ if I'm right in 3 years time; then obviously ANOTHER REAL ESTATE MARKET in another suburb/city, etc in Australia will be still affordable & so other investors would therefore stop investing where they are & seek out new areas that are cheaper with increased yields & more potential for higher capital growth; & so the transfer of money continues...
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Hey GSJ! Forget your examples - I just had a look and the UNIT NEXT DOOR (same building) is under contract for an apparant $349K!!!!!!!!!!!
http://www.realestate.com.au/cgi-bin/rsearch?a=o&id=104236530&f=0&p=10&t=res&ty=&fmt=&header=&c=35145985&s=qld&snf=rbs&tm=1190458968
I could have just hid that information but in the spirit of open discussion I am happy to share it! Will give you lot some entertainment for a while if nothing else. I'll answer your questions below:
Did I make the right move? Time will tell - I think $275K is outrageous and I think $349K is even more outrageous. A quick search of realestate.com gives me rentals in similar places around $285 to $300 / week max. At $275K it is a yield of 5.5%. At $349K it is a yield of 4.4%. There seems to be even more 'greater fools' around than I thought there were.
Did I time my exit well? NO! But that is very easy to say in hindsight. It depends on how much longer I wanted to carry the risk (see comments below).
Did the crash eventuate? Not yet. But 2 years is nothing.
Could I buy cheaper today? Nope.
Intrinsic Value? $195K. Rent of $300 / week at a yield of 8% gives an implied value of $195K. If I was the bank I wouldn't lend more than $195K either for this very reason.
At what price would I buy again? $195K
Is the rental yield too low? Yes - way too low. In any other investment vehicle people get a REWARD for their risk. In property you PAY your bank and your tenant for the priveladge of taking on risk! It's absolutely strange and nobody has been able to explain it to me (except for the pyramid scheme theory which seems to fit the facts pretty well).
Opportunity cost of not holding on to that property? I can work it out. Over the last 2 years I have made $15K in after tax income on my equity that is now employed elsewhere. My holding costs for the 2 years would have been about $10K (financing costs and rent gap, other costs, rates, body corp). So if I had chosen to hold it another 2 years and then sell I would be about $50K ahead less taxes. (providing ofcourse it actually sold for $349K - that is the realestate.com figure)
No regrets though. You have to remember - I am of the firm view that none of the gains from about 2002 onwards can last long term as they are all based on unsustainable levels of debt. So having $90K in the bag - risk free - can't lose it now - is preferable to me than staying in the game for a potential $150K gain but still holding the risk of losing it. And I know you are all thinking "it's never dropped before so what risk?" - but it's never gone up like this before either and people in the USA (up to 2006) and Japan (in the late 80s) used to make the same claims until suddenly something happened that hadn't happened before - it dropped.
If by 2009 that piece of **** property is still selling over $300K then I will declare my play a failure - that will be long enough I think to make a judgement. And if that is the case well - so be it - you live and learn. I'm happy to have independent thought and to have the conviction to act on those thoughts despite what the rest of Australia might be doing.
Not trying to pick on you YM, but now that someone has finally given some cold hard figures it makes it easier to comment. First, I would say that I'm not condeming you're decision to sell, but I believe what you have written here is totallu unrealistic.
You expect that property to drop by over 40% from $349k (assuming it sells for that for the sake of simplicity) to $195k where you expect it to be reasonbable? I don't consider that to be realistic, even when a market crash in that area does come - especially since you are talking about a few years of growth - not just the last 6-18months of growth. This 40%+ drop is also assuming the property crash happens next week and the price for that proerty does'nt rise any further over the next year or so if the crash doesn't come, otherwise it will need a drop of closer to 50-60% for it to be fair value for you.
Perhaps this is the fundamental point where we differ, I don't see that as realistic or probable in the slightest, where as you do - but that's fair enough, as that's your opinion. What I don't like is that being used as an example why people everywhere in Austrlia should no longer be buying property at current prices.
I appreciate these are different markets, but why has'nt household debt and income levels stopped the rise of property prices in London, NY etc? This is another question that always seems to be overlooked...
Not yourself specifically HY, but it just bugs me when people make generalisations about the whole Australian market and how because of debt/income levels, historic figures, patterns in other countries etc. - that the Australian market is over valued and due for a crash. There are thousands of different markets around Australia, and sweeping generalisations about how people should not be buying, or even should be selling could be quite harmful to as yet less experienced people who come to SS and listen to these statements.
If they are referring for example to Perth apartment prices, then they could well be right (I don't know, I don't know Perth prices) - they are overvalued and ready for a crash, but then that needs to be said to put the comments into context. As there are other markets in Australia where you can get a decent sized house, on large land, for less than $200k which is on a decent yield. The sweeping generalized comments include this house too, and when people are advised all Aussie property is overvalued - it's just not correct. That is where I get annoyed.
Regarding generalisations:
At the micro level within a country there there are different areas, different incomes, different circumstances. I agree. Big cities like NY for example would have attracted a higher income person over time (and got rid of lower income) which helped (to a degree anyway) in pushing up prices.
At the macroecnomic level though the sum of all these micro markets must make sense. Hence my interest in debt / income levels, house prices rising above wages, trade deficits, foregin debt etc. A lot of these numbers don't make sense and that's why I love talking about it. I acknowledge though that I am so interested in these big picture numbers I can miss small picture opportunities right in front of my face! In the long term though the big picture will impact those micro markets so it's worth talking about.
But out of respect for all those that hate big picture discussions I've started another thread in the Property Market Economics section. Hopefully it will get some interest.
A tale of doom and gloom
BUMP!
I almost forgot about this one...
yieldmatters,
What's that piece of **** property selling/renting for now???
I haven't had a chance to look it up...
Hey GSJ! Forget your examples - I just had a look and the UNIT NEXT DOOR (same building) is under contract for an apparant $349K!!!!!!!!!!!
http://www.realestate.com.au/cgi-bin/rsearch?a=o&id=104236530&f=0&p=10&t=res&ty=&fmt=&header=&c=35145985&s=qld&snf=rbs&tm=1190458968
I could have just hid that information but in the spirit of open discussion I am happy to share it! Will give you lot some entertainment for a while if nothing else. I'll answer your questions below:
Did I make the right move? Time will tell - I think $275K is outrageous and I think $349K is even more outrageous. A quick search of realestate.com gives me rentals in similar places around $285 to $300 / week max. At $275K it is a yield of 5.5%. At $349K it is a yield of 4.4%. There seems to be even more 'greater fools' around than I thought there were.
Did I time my exit well? NO! But that is very easy to say in hindsight. It depends on how much longer I wanted to carry the risk (see comments below).
Did the crash eventuate? Not yet. But 2 years is nothing.
Could I buy cheaper today? Nope.
Intrinsic Value? $195K. Rent of $300 / week at a yield of 8% gives an implied value of $195K. If I was the bank I wouldn't lend more than $195K either for this very reason.
At what price would I buy again? $195K
Is the rental yield too low? Yes - way too low. In any other investment vehicle people get a REWARD for their risk. In property you PAY your bank and your tenant for the priveladge of taking on risk! It's absolutely strange and nobody has been able to explain it to me (except for the pyramid scheme theory which seems to fit the facts pretty well).
Opportunity cost of not holding on to that property? I can work it out. Over the last 2 years I have made $15K in after tax income on my equity that is now employed elsewhere. My holding costs for the 2 years would have been about $10K (financing costs and rent gap, other costs, rates, body corp). So if I had chosen to hold it another 2 years and then sell I would be about $50K ahead less taxes. (providing ofcourse it actually sold for $349K - that is the realestate.com figure)
No regrets though. You have to remember - I am of the firm view that none of the gains from about 2002 onwards can last long term as they are all based on unsustainable levels of debt. So having $90K in the bag - risk free - can't lose it now - is preferable to me than staying in the game for a potential $150K gain but still holding the risk of losing it. And I know you are all thinking "it's never dropped before so what risk?" - but it's never gone up like this before either and people in the USA (up to 2006) and Japan (in the late 80s) used to make the same claims until suddenly something happened that hadn't happened before - it dropped.
If by 2009 that piece of **** property is still selling over $300K then I will declare my play a failure - that will be long enough I think to make a judgement. And if that is the case well - so be it - you live and learn. I'm happy to have independent thought and to have the conviction to act on those thoughts despite what the rest of Australia might be doing.
BUMP!
I almost forgot about this one...
yieldmatters,
What's that piece of **** property selling/renting for now???
I haven't had a chance to look it up...
It's not. Somebody tried to sell it in late 2008 but no buyers so they gave up. Now there are even less buyers. So the nutter that paid $350K will likely be burnt.
Thanks for the bump though. Interesting to look back. More confident than ever now that my conclusions on debt being unsustainable was right.
yes was a nice call YM. I looked up www.foxtons.co.uk to see how a 2 bedroom flat I sold in london was looking. After hearing all about the property crash there I thought great, I can buy it back at half the price. Well I sold at 250,000 STG in 2000 and comparatives now are looking at about 350,000 STG. Disappointing. Anyway it seemso forecasts of another 30 to 40% drop there are quite achievable I should think, particulalry given the economic woes within London itself.
I'll jump in here and say that it will come from wages....and we all know inflation will push those up...
Hmmm...
I haven't got confirmed recent sale prices on me at present...but from what's on offer for comparable 2X2X1's at the moment we have, for example:
$419,000
http://www.realestate.com.au/cgi-bi...r=&cc=&c=24108730&s=qld&snf=ras&tm=1237601312
$439,000
http://www.realestate.com.au/cgi-bi...r=&cc=&c=24108730&s=qld&snf=ras&tm=1237601312
$409,000
http://www.realestate.com.au/cgi-bi...r=&cc=&c=24108730&s=qld&snf=ras&tm=1237601312
$389,000
http://www.realestate.com.au/cgi-bi...r=&cc=&c=24108730&s=qld&snf=ras&tm=1237601312
$369,000
http://www.realestate.com.au/cgi-bi...r=&cc=&c=24108730&s=qld&snf=ras&tm=1237601312
$379,000
http://www.realestate.com.au/cgi-bi...r=&cc=&c=24108730&s=qld&snf=ras&tm=1237601312
$389,000
http://www.realestate.com.au/cgi-bi...r=&cc=&c=24108730&s=qld&snf=ras&tm=1237601312
$389,000
http://www.realestate.com.au/cgi-bi...r=&cc=&c=24108730&s=qld&snf=ras&tm=1237601312
$399,000
http://www.realestate.com.au/cgi-bi...r=&cc=&c=24108730&s=qld&snf=ras&tm=1237601312
$379,000
http://www.realestate.com.au/cgi-bi...r=&cc=&c=24108730&s=qld&snf=ras&tm=1237601312
$418,000
http://www.realestate.com.au/cgi-bi...r=&cc=&c=24108730&s=qld&snf=ras&tm=1237601312
And there's quite a few ''under offer/under contract''...so I think they ARE selling.
Your piece of **** property is probably on the lower end of these price points, but still...
No crash it seems.
But not a huge increase from late 2007 either.
Not surprising really.
Will be interesting to see what happens by the end of 2009...
Certainly by 2010 if prices haven't yet tumbled, your ploy will clearly be a failure.
...And a wonderful tale of one person's doom and gloom to be used future reference!
If he hasn't sold it yet then its very unlikely he will get burnt now since the increased FHOG is starting to push up the sub $500K market plus he would have got some rental return and tax deductions along the way.
The return then may have been smaller then having the money in a term deposit but is probably better then a TD now and he probably made some small CG as well. At least he didn't invested in ASX stocks where he could have been burnt to a crisp and where even some blue chips like BSL have fallen up to 80%. Hopefully all these FHBs that got the $21K grant are building houses with Colorbond roofs.
Based on those asking prices I think if you listed it at $301k it would sell in a flash. Given we're 1/4 into 2009 I thought you'd be declaring your play a failure, although it looks like you've twisted it around somehow.
Property goes up and it goes down. Doesn't take a genius to work that one out. Now, if you could time it, that would be awesome, but looks like you're about as good as we are at it.
As JIT says we can check again in 2010, it's only 8 months away...
Property goes up and it goes down. Doesn't take a genius to work that one out. Now, if you could time it, that would be awesome, but looks like you're about as good as we are at it.
As JIT says we can check again in 2010, it's only 8 months away...
If you are a trader, then this issue of whether the price will drop or go up is of great importance, and the timing is premium.
YM sold his place thinking there would be a drop in prices because he believed property was overvalued compared to wages. Maybe it was, and what normally happens is the prices stop until the wages catch up again.
But is he a trader or a buy and holder? Sounds like a trader based on his mindset at the time.
For a buy and holder, while timing is still important, the reality has always been that the prices will keep going up steadily, so there's no real reason to ever sell unless you get into financial hotwater and need to.
Maybe YM thought there was a better opportunity cost elsewhere.
By the time you run around looking for the best opportunity cost to throw money at, you've not done anything at all.
It's paralysis by analysis.
Right now, I'm seeing prices come off a bit from 2 years ago, but they are still up from if you had bought 4, or 7, or 10 years ago.
YM sold his place thinking there would be a drop in prices because he believed property was overvalued compared to wages. Maybe it was, and what normally happens is the prices stop until the wages catch up again.
But is he a trader or a buy and holder? Sounds like a trader based on his mindset at the time.
For a buy and holder, while timing is still important, the reality has always been that the prices will keep going up steadily, so there's no real reason to ever sell unless you get into financial hotwater and need to.
Maybe YM thought there was a better opportunity cost elsewhere.
By the time you run around looking for the best opportunity cost to throw money at, you've not done anything at all.
It's paralysis by analysis.
Right now, I'm seeing prices come off a bit from 2 years ago, but they are still up from if you had bought 4, or 7, or 10 years ago.
