"When" to buy - The tipping point hypothesis

[MichaelW]

It's early in the morning and I haven't had a coffee yet!

Stewie,

Good point. I better go get mine and go to a meeting, but when I get back I'll pen an answer to your question. Its a really good one and something I was considering myself but I think the hypothesis has it covered.

I'll explain it this afternoon when I "escape" from my day of back-to-back non value add meetings.

Oh the drudgery of management...

Phew, that was quick! Just got an hours reprieve on that meeting so will answer this question first:

Anyway, my question - is there merit in overlaying your analysis with some supporting measures? For instance, you have written about fundamental measures in previous threads and one that comes to mind is 'affordability'. Is there correlation between your tipping point and house price affordability? Whilst it may seem 'obvious' that there is, like any analysis it is worth doing the numbers; Could we have a situation where your TP is zero yet median house prices are still upwards of 6 to 8 times median income?

Stewie, I think it comes down to price parity. Regardless of the median price of a house, the price parity suggests that for "any given house" it is the same cost to rent as it is to buy. Sure, there might be more affluent renters who are now renting some pretty expensive houses, but price parity suggests that they might decide to buy those houses when the tipping point is reached instead of continuing to rent. Conversely, at the bottom end of the market, the "battlers" (God I hate that term...) are just making their rent payments on the little fibro shack in Dare-I-mention-a-postcode, but realise that they might actually be able to escape the rat race and buy instead of rent.

Don't forget the excellent point made earlier too that for some people it will require a "negative" tipping point before they make the move. You just can't help some people! This will vary postcode to postcode I suggest, but the beauty of demographics and statistics is that it is likely to be statistically significant for each postcode.

So, I don't think affordability from a "median price" perspective is relavant. Of course, I am hypothesising that affordability from a "amount of $$$ on rent vs buy" is immediately applicable. Renters will choose to rent when they haven't got enough cash to buy. They are "utility maximisers" who want the best place they can for their $1,000 a month. Now, suppose that this $1,000 a month can now pay the interest on a mortgage. This is when I'm proposing they might make the call to switch to becoming a buyer rather than a renter. Throw in a nice little FHOG and some media reports of real estate booms and there'll be no stopping them because good old fear and greed then feeds the boom and every man and his dog wants in.

Cheers,
Michael.

 

[Barracuda]

Guys,
The first point to make here is that you're not normal! Statistically speaking of course...

I was thinking about that point last night, in reviewing my feedback. You're probably right there - I am lucky that when it came to the PPOR it wasn't a case of choosing between food on the table or rent/mortgage. We were able to choose a hit to discretionary spending instead. So, in putting myself in another man's (or women's) shoes, I can appreciate that the decision between rent & mortgage can be a direct comparison for some.

Chuck all the figures & variables you can think of into a big regression analysis and see what pops out...

 

[Bill.L]

Hi all,

Michael,

The fact that the 80's scenario does not fit your hypothesis, is not a reason to discount what actually happened.

In the 70's inflation was higher than the 80's and there were different forces at work. Throughout all of this we had different types of lending policies from the banks. (ie need 25% deposits and show savings/banking history with the institution etc).

The next boom will most likely be due to some totally unforseen criteria. However in hindsight you will find a very good reason for it, and possibly a formulaic approach to it.

In all types of investments there are many that have "analysis paralysis". Even on this forum there are some who have been waiting for the perfect opportunity to buy for a few years, and missed a large part of the last boom. However when the next boom starts, they will be ready !!

bye

 

[MichaelW]

You're probably right there - I am lucky that when it came to the PPOR it wasn't a case of choosing between food on the table or rent/mortgage. We were able to choose a hit to discretionary spending instead.

barracuda,

Spot on. And I KNOW how much discretionary spending you had remember and where it was all going. Dare I mention that for you it was always an "option" to eventually buy your PPOR whenever you decided to get around to it.

Cheers buddy,
Michael.

 

[keithj]

Hi Micheal,

Did you consider using OO Home Loans as opposed to all Residential Loans, which includes Investment Loans ?

If this showed that Investment Loans were a large %age of Total Housing sector credit at some points in time what effect would it have on your hypothesis ?

Cheers

KJ

 

[see_change]

Hi Micheal,

Did you consider using OO Home Loans as opposed to all Residential Loans, which includes Investment Loans ?

If this showed that Investment Loans were a large %age of Total Housing sector credit at some points in time what effect would it have on your hypothesis ?

Cheers

KJ

Keith , interesting thought ( as always )

I wonder if it's possible to track the percentage of total loans that are investment loans. Could be well worth looking at , to see if there is an increase prior to or early on in each cycle.

Rolf ?? Mark ?? Do you know if that info is available ?

See Change

 

[Jamie]

I wonder if it's possible to track the percentage of total loans that are investment loans. Could be well worth looking at , to see if there is an increase prior to or early on in each cycle.

Rolf ?? Mark ?? Do you know if that info is available ?

There is a bit of stuff on the ABS website - have a look here for the most recent month's data.

If you click on the "Past and Future Releases" tab you can go back a few years - just not sure how far though (only quickly looked through it)

Jamie.

 

[keithj]

I wonder if it's possible to track the percentage of total loans that are investment loans. Could be well worth looking at , to see if there is an increase prior to or early on in each cycle.

Do you know if that info is available ?

SC,

See Westpacs weekly briefing (P2) for 1995-2005 breakdown - it's interesting.

As an aside, I always read their weekly briefing.

KJ

 

[handyandy]

I wonder if it's possible to track the percentage of total loans that are investment loans. Could be well worth looking at , to see if there is an increase prior to or early on in each cycle.

You would also need to be able to strip out refinance investment loans

or maybe in that early part there is very little refinance happening as no gains have happened for a while. Another indicator!!!!!

Cheers

 

[see_change]

SC,

See Westpacs weekly briefing (P2) for 1995-2005 breakdown - it's interesting.

As an aside, I always read their weekly briefing.

KJ

Hard to tell specifics ( as a percentage ) from that chart as it's giving the absolute value rather than percentage, though it would appear around early 2001 the percentage was increasing. Obviously the overall value of loans is also increasing and that increase also occures at the beginning of the previous steeper rising ( sort of stating the obvious ) .

Another factor worth watching.

I wonder if a state by state breakdown is around . would be interesting to know how much of the current increase is coming from WA , as opposed to other states.

See Change

 

[Stewie]

MW, whilst I agree that when it comes to the question of whether you should spend your $1000/mth renting or buying (assuming you can get the same type of house for your money and therefore affordability is out of the equation) the answer appears to be obvious however, I would argue that finding a deposit is a barrier for many people. Therefore, if TP is at, or around zero but affordability is at 6 to 8 times median income then to make the switch from renting to buying will require a much larger deposit, and thus form a barrier for many people.

 

[keithj]

Hard to tell specifics ( as a percentage ) from that chart as it's giving the absolute value rather than percentage, though it would appear around early 2001 the percentage was increasing. Obviously the overall value of loans is also increasing and that increase also occures at the beginning of the previous steeper rising ( sort of stating the obvious ) .

Another factor worth watching.

I agree the chart is a little low in detail, and it only covers one cycle. What I got from it was that OO loans increased steadily over the period - no spikes. However, Investment loans were fairly steady until 2001 when they increased markedly. Maybe a graph showing -
percentage change in OO loans plotted against change in Inv loans
would be clearer.

This may show that OO loans increase at a constant rate while Inv loans change depending on whether IP is good value? Would this show that owner occupiers are a constant that should be ignored, while investors are the real driving force in the cycle ?

KJ

 

[MarkB]

A interesting theory but ......

The set of figures where that the theory doesn't seem to work is late '80s interest rate 14% up to 17% and if you were involved in a bad rate 24%.

Yields on rental were at about 7% with the initial interest rate 14% but we still had a boom and it was a biggy.

I suspect you have applied the current set of figures and invented a formulea to suit you need to back test it across several booms to really determine its viability.

I look forward to further refinements.

I can't believe I am doing this (fanning the flames of indecision and over-analysis), but the answer may be found in a very basic economics concept.

Unless I have missed something on a reading of this thread, thus far people have talked only about the nominal interest rate.

The price of money is not the nominal interest rate, it is the real interest rate (inflation adjusted).

Someone else can pull the stats, but when you exclude the effects of CPI, then the real interest rates of the late 80's aren't far off the rental yields mentioned above.

Mark

 

[simonjulie]

Hi all
Great thread.
The point about the difficulty in raising deposits may be overcome by the July 06 introduction of Shared equity loans 60%/40% on future growth. Will that effect the tipping point? If borrowers no longer need to save a deposit?
Simon

 

[MichaelW]

I can't believe I am doing this (fanning the flames of indecision and over-analysis), but the answer may be found in a very basic economics concept.

Unless I have missed something on a reading of this thread, thus far people have talked only about the nominal interest rate.

The price of money is not the nominal interest rate, it is the real interest rate (inflation adjusted).

Someone else can pull the stats, but when you exclude the effects of CPI, then the real interest rates of the late 80's aren't far off the rental yields mentioned above.

Mark

Mark,

Excellent point. See, I knew you were a closet analyst!!

I had made the point about rampant inflation in the 80s, but hadn't linked it back to looking at the inflation adjusted interest rate that would have been prevalant at that time.

Regardless of which way you look at it, this is a simple concept with immediate applicability. Basically, when its cheaper to buy than rent, a large number of renters will make the call to buy. When that happens it has the potential to open the floodgates in the property market and bring on a boom.

I reckon that demand and supply are the fundamental tenets of any market, and property is no exception. When people want it and can afford it at the current price point, then they'll buy it. The rest is history as they say...

And on that note, Sydney is currently NOT at the tipping point. So, NO, there is no imminent boom around the corner for Sydney IMHO. Give it another year or two and yields might have recovered and house prices softened and mortgage interest rates come off 25 basis points. Then you might see an environment where a boom is possible. Until then you'll likely see price growth in line with inflation, or flat/falling.

Cheers,
Michael.

 

[thefirstbruce]

Michael,

I am Pitt St in that quanitifying sentiment cannot be overlooked.

If I had a string of REAs I could rely on, then I'd say their experience with trends in enquiries, offers, and settlements, would be one of my key criteria.

I also think the banks are in a great position to pick the beginning of booms, through loan enquiries and approvals. Conveyancing solicitors also get an advantage.

Finally, I'd also think the general sentiment of first home buyers and investors would be a great lead in. However, I am unaware of any surveys regularly targeting such. THough the talk at the local pub, gym, pre school, or church might be a fair indicator.

 

[see_change]

Mark,

Regardless of which way you look at it, this is a simple concept with immediate applicability. Basically, when its cheaper to buy than rent, a large number of renters will make the call to buy. When that happens it has the potential to open the floodgates in the property market and bring on a boom.

I reckon that demand and supply are the fundamental tenets of any market, and property is no exception. When people want it and can afford it at the current price point, then they'll buy it. The rest is history as they say...


Michael.

Speaking from personal experience, Our decision to buy a PPOR had nothing to with considerations with the comparitive cost of renting a place.

When we bought our IP's , almost every one would have been cheaper for the tenant to buy than rent.

We saw several houses where the tenant said they'd like to buy the place. On a couple of occasions ( in places we wern't interested in ) we told the tenant it would be cheaper for them to buy than rent. Did they buy , we checked with the agent ... nup.

If it was a simple matter of the cost of buying Vs renting, why is rocky booming at the moment with yields going under 6 % , while it was in the doldrums three years ago with returns around 9-10 % .

Sydney was booming 2 1/2 years ago , and now has better yields.

Obviously affordability is an factor, but I think emotions and herd behaviour have a bigger part.

See Change

 

[Corsa]

3. Be patient

If you know your strategy is a good one, then be true to it and don't "force" the strategy. I won't get into a long-winded debate about the relative merits of timing the market and time-in the market, but not all strategies work all of the time. My personal, buy-and-hold is reliant on capital growth. At present I believe my local postcode is still marginally over-valued and not positioned for short term capital growth, so I’m still waiting on that first IP. I’m not writing off my strategy, and it is tough watching from the sidelines whilst others with differing strategies are profiting from them, but I’ll stay true to it and wait my turn.

Hi Michael

Just thought I would offer an opinion on your approach. I have quoted from another post about the last 12 months as well as I also think it is relevant.

You mention here that you are still waiting on that first IP and that you are watching from the sidelines whilst other are profiting. Sometimes you have to assess different market conditions and adjust your approach and expectations accordingly.

Whilst I commend you completely for taking an analytical approach (I am a numbers gal myself ) however I fear you are taking such an analytical approach that it means you don't ever purchase - possibly for fear of something else being better out there? I am not sure, but I know with my purchases, my due diligence has definately got better along the way, but overall there was an element of gut feel - will this suburb experience growth and will people want to live here etc etc.

So, I look forward to hearing about the time when something does meet your criteria based on this kind of analysis and even 1-3 years down the track to see how the growth turned out etc in line with your earlier analysis.

Best Wishes

Corsa

 

[JIT]

K.i.s.s.

I think the best part of residential property investment is its simplicity. Anyone can learn the principles of purchasing a good investment property, and when. The information is freely or cheaply available and accessible to everyone, and I don' feel there are any real "secrets" to generating wealth with this particular asset class.

My feeling is that this detailed level of analysis is best left for other investment classes, eg, the sharemarket: technical analysis, day traders, options, futures etc..., where timing is much harder to predict and would require more skill/knowledge/experience/strategies/abilities.

Residential property is certainly not "rocket science". If you are interested in using it to generate wealth, then it's best to keep it simple. Leave the theories and analysis to the Professsors, intellectuals and Phd students!

GSJ

 

[MichaelW]

ILeave the theories and analysis to the ... Phd students!

GSJ,

Now why didn't I think of that!

I agree with you though. The beauty of real estate investment is that it is a relatively simple concept that most investors can benefit from with little effort. Its the beauty of leverage and compounding growth with the added benefit of tax deductibility of paper losses whilst "banking" capital gains.

I'm a big advocate of time in the market over timing the market. I just put this thinking out there for the benefit of others and to create some interesting dialogue. I believe it MAY be applicable, but would take some effort to prove as much. In the meantime I'm currently scouring my area for my next IP and not waiting until the "tipping point" is reached.

I just reckon that when it is, we might well be in the early stages of an imminent boom. Looking forward to that day!

Thanks,
Michael.