A brief note on property markets (fyi, fwiw & imho)

[MarkB]

There's a variety of threads on the economics boards atm (links below) concerning the status quo of a variety of property "markets" in this Australia.

From an economic perspective property markets are defined by the type of property, its geographic location, its potential uses, and time.

To get an accurate picture of what a particular market is doing, you first need to define that market.

That being the case, it is worthwhile asking yourself these sorts of questions:

- What types of properties are in the same market? Units and houses? Farms and tree-change lots? 2 bedroom places and 4 bedroom places?

- What is the geographical nature of the market? Is Sydney one market? Are there markets in, for example, the eastern suburbs, north shore, etc? Are the markets more specific - are they suburb based?

- What are the potential uses of the property in question? Who may want to buy it (owner-occupiers, investors)? It it a case of wysiwyg*? Or could it be renovated, redeveloped, subdivided, re-zoned, re-purposed?

- What else is for sale at this point in time that is comperable to this property? (bearing in mind the other factors above)


I think it is good to have an appreciation of wider trends, but as you cast your net wider and take account of more information the picture may only get fuzzier and it may not neccesarily help your purchasing decisions.

I also think it is worth noting that buying property well is about being selective. It is not about simply buying an otherwise forgettable piece of suburbia and riding the state of the wider market, but achieving returns above and beyond.

The reason I say this is that during booms just about anywhere is going to appreciate. During slumps or periods of slow growth, then the "Sydney", "NSW", or "Australian" property markets may do bugger all for years on end.

But somewhere, out there in property investment land, there is always a particular market where the realities of demand and supply are in its favour.

I am always looking for such markets.

Mark

*wysiwyg - what you see is what you get


Melbourne set to boom (eventually)

More bad news on the Sydney market

Analyzing the state of the WA market

Where is NSW in the property cycle?

Current state of play for the Australian property market

 

[JIT]

But somewhere, out there in property investment land, there is always a particular market where the realities of demand and supply are in its favour.

I am always looking for such markets.

Mark

BUMP!

How could this post have gone 'under the radar' so long???

Agree 100% with this one - not just posting out of pity!

GSJ

 

[Sunfish]

In no way wishing to play down Pitt's post, it's a good one, but the short version reads All property is local.

But that logic extends to all markets. There is always something out there going against the trend, good or bad.

 

[JIT]

Yes, I thought this post was quite pertinent in the context of the recent 'boom theory' and 'timing' threads.

GSJ

 

[MarkB]

Sunfish

Yes, I'm a believer that resi markets are locally based (and largely driven by localised factors as simple as local employment, local incomes, local housing supply, and local demand [population / household formation]).

But for some (many?) investors there is a fascination with national factors such as the interest rate, cpi, etc. It perplexes me, I have to say and I'm of the view that if the local fundamentals are good, then invest irrespective of national factors.

But, I do think there are some props for which the market is national - they're just beyond the reach of 99.99% of people - they're for those in the $100m plus bracket who want large tracts of land, shopping centres, high rise, etc.

M

 

[Michael Croft]

Sunfish

Yes, I'm a believer that resi markets are locally based (and largely driven by localised factors as simple as local employment, local incomes, local housing supply, and local demand [population / household formation]).

But for some (many?) investors there is a fascination with national factors such as the interest rate, cpi, etc. It perplexes me, I have to say and I'm of the view that if the local fundamentals are good, then invest irrespective of national factors.

But, I do think there are some props for which the market is national - they're just beyond the reach of 99.99% of people - they're for those in the $100m plus bracket who want large tracts of land, shopping centres, high rise, etc.

M

Well I cheerfully disagree, again . I don't think it is a black or white issue, it's shades of grey, or wheels within wheels. If it were simply a matter of local factors or national factors, it would be dead easy for any half intelligent individual to make a motza of timing the next local boom. It just ain't that simple and there are exceptions.

Yes local factors are important and so are national ones. The little town of Lithgow NSW boomed a couple of times whilst the rest of Australia stagnated. There were national (global) events influencing the local economy. Lithgow just happened to manufacture the .303 rifle, and when war came it boomed whilst every one else battened the hatches. Conversely it died post war(s) when the rest of economy recovered.

So is Lithgow a chicken and egg argument? Which came first the local factor or the national (global)? Which is most important, or are both equally important? Actually it's irrelevant. The point being, you ignore either one at your financial peril.

It's the interplay between local and national factors that make residential property interesting (well to me anyway). It's this interplay that keeps the punters guessing. If it were simple they'd all be Timing Lords.

Now let's assume that there is a looming recession (national), it will affect all local markets to varying degrees. So to jump in to a local market because it's starting to boom and ignoring the gathering national storm clouds, is foolhardy at best.

So again hypothetically speaking, and following your advice, I buy an investment property based on positive local factors, even when the national economic consensus is negative - that a sharp rise in interest rates is on the cards? I wish it were that simple.

M

 

[keithj]

Where or When?

Yes, I'm a believer that resi markets are locally based (and largely driven by localised factors as simple as local employment, local incomes, local housing supply, and local demand [population / household formation]).

But for some (many?) investors there is a fascination with national factors such as the interest rate, cpi, etc. It perplexes me, I have to say and I'm of the view that if the local fundamentals are good, then invest irrespective of national factors.

Hi Mark,

IMO it comes down to the where vs. when. If you're from the 'buy quality when you can afford it, because everything will be fine in the long run' school, then I'd agree with all the above.

If you're from the 'big picture/value seeking/timing lord' school then the when is just as important as the where. These students still consider the where? question, but only after the answer to the when? is satisfactory. The answer to the where? question often stays the same for many years, the answer to the when? question changes much more frequently.


Cheers Keith

 

[MarkB]

Well I cheerfully disagree, again .

I'd be dissapointed if you didn't.

So again hypothetically speaking, and following your advice, I buy an investment property based on positive local factors, even when the national economic consensus is negative - that a sharp rise in interest rates is on the cards? I wish it were that simple.

If you follow the NZ press and what the RBNZ says, then you'd think that it isn't wise to buy IPs in NZ atm.

Interest rates are on the up in NZ (already highest in the OECD) and speculation of further rises to follow. Dr Alan Bollard (NZ RB Gov) has repeatedly stated that the property market is in dangerous territory and he wants it to cool. It is constantly on the news and in the press.

But down in the deep south there's a city called Invercargill that has a growing polytech, the lowest unemployment in NZ, a rising population, strong community organisations that inject millions into the local economy each year, oil offshore, gas and lignite onshore, etc, etc.

I've stated the reasons why I think Invercargill is a good prospect in other threads, but my point is that I believe it's localised factors are contributing strongly to its current position as the metro in NZ with the highest CG.

M

 

[MarkB]

Keith

I think alot of what you call when is what I would call "white noise" (a term often used in statistics to describe information that looks meaningful on the surface, but is actually useless and irrelevant and only diverts attention away from what really matters).

I get people ask me all the time what's happening with interest rates, exchange rates, cpi, etc (they know my background) and my standard answer is (with a smile, of course) "I don't know, I don't follow them, and for the most part I don't care".

And imho I think that there's always a where, irrespective of whether the wider macroeconomic fundamentals are saying when or not.

M

 

[Michael Croft]

Have to agree with Keith's synopsis and state it again; it's location and timing that will give the best returns. Not one vs t'other, or either/or. They are not mutually exclusive.

It may be the time to buy in Invercargill N.Z. based on local factors. It may also be that the town is immune from the blunt instrument that is fiscal policy. It may well be that the policy of decentralisation that currently favours Invercargill remains in force. But do I want to base my investment decisions on a few maybes? Sometimes, but not ususally.

Would I be significantly disadvantaged if I waited until the interest rate environment was more favourable? The local positives, if they are of substance, will still be there as interest rates fall. I would then be able to buy in as affordability starts to improve and catch the wave of rising prices. Granted had I bought a few years earlier I might have made another 10% cap growth, but at what opportunity cost?

With Invercargill, the old adage "the exception does not disprove the rule" comes to mind. Fine if you have the time to seek out the exceptions, they do exist. But easier and bigger profits are made when the stars of location and timing are aligned.

MC

 

[JIT]

Which is most important, or are both equally important? Actually it's irrelevant. The point being, you ignore either one at your financial peril.

Hard to disagree with that logic.

So again hypothetically speaking, and following your advice, I buy an investment property based on positive local factors, even when the national economic consensus is negative - that a sharp rise in interest rates is on the cards?

M

Isn't that what you did today morning though?

http://www.somersoft.com/forums/showthread.php?t=33273

GSJ

 

[Sunfish]

Pitt, again I agree with you. Let's hope this doesn't become a habit.

Most days commentry on why things happen is so short sighted it's a joke. "Profit taking" for God's sake. So glib.

BTW Us techies use "white noise" too. It is the hash you hear when your radio is not tuned into a station. In certain circumstances it is a useful signal source when fault-finding receivers. In any circumstance it is the background noise we must get the desired signal a few DB above to be useful. That's what you are trying to do too. LOL

 

[MarkB]

Fine if you have the time to seek out the exceptions, they do exist.

Umm, like the example of Canberra in 1975 that you gave in Keith's thread?

It may also be that the town is immune from the blunt instrument that is fiscal policy.

Btw, I think you meant monetary policy, not fiscal policy.

Granted had I bought a few years earlier I might have made another 10% cap growth, but at what opportunity cost?

How you miss "10% cap growth" in a market that's doing over 20% pa by waiting for interest rates to fall is simply unreconcilable.

Pitt, again I agree with you. Let's hope this doesn't become a habit.

And it looks like it's just you and me on this side of the fence.

M

 

[JIT]

Have to agree with Keith's synopsis and state it again; it's location and timing that will give the best returns. Not one vs t'other, or either/or. They are not mutually exclusive.

Hard to disagree with that logic.

Would I be significantly disadvantaged if I waited until the interest rate environment was more favourable? The local positives, if they are of substance, will still be there as interest rates fall. I would then be able to buy in as affordability starts to improve and catch the wave of rising prices. Granted had I bought a few years earlier I might have made another 10% cap growth, but at what opportunity cost?

Yes, but what I would say is that this is all much easier for someone to say when they already have a few properties and substantial equity behind them. If you look at it from a beginner's point of view - say someone has 50k savings and nothing else, and they want to start on the road to financial freedom, and they decide to use property as their investment vehicle because many people have said that it is the easiest and safest way to build equity, and shares are more volatile, have less leverage, require more skill, and they are not 'good value' now so it's not the right time anyway...Would you tell this beginner that they should wait till the 'fundamentals' or the 'stars' or whatever are alligned before they do anything? And, in the meantime, just keep that 50k in their ING savings account until that ideal time? If they want a prime location blue chip property, and in 2 or 3 years time this type of property does grow 10% or more (and this IS already happening in some areas for those watching closely), they may no longer be able to afford to even buy this type of property at that time? Their wages and savings capacity may not increase to match during this time period, and in any case, what chance do they have when they'll be competing against all the 'value investors' out there too for the same prime blue chip properties. THIS is the opportunity cost that I am talking about.

But easier and bigger profits are made when the stars of location and timing are aligned.

MC

Hard to disagree with that logic.

But, I don't believe most beginning investors have this luxury, which is my main point. I don't think newbies should get carried away in trying to time the market buy waiting for all the 'fundamentals' to fall into place. At the very least, they appear to be heading in the right direction, with rising rents and low vacancy rates etc...

GSJ

 

[MarkB]

Fine if you have the time to seek out the exceptions, they do exist. But easier and bigger profits are made when the stars of location and timing are aligned.

Umm, like the example of Canberra in 1975 that you gave in Keith's thread? M

To recap:

Look at 1973 - 1975 - negative real interest rates and yet property tanks it. Of course, the economy was up crap creek at the time [it was in recession, actually] ...

Well, I was 'playing' in that period. It was an absolute boom time in Canberra. Gough Whitlam was in power and many govt. departments were relocating to the bush capital. So big was the boom that a builder I know was offering offering $29,995 house and land packages in Weston Creek and couldn't keep up with demand. So he ordered the agents to put the prices up $10,000 on all his houses in '73 and still they sold. He built 121 houses in 1974, and 102 in 1975, you do the math! It made him a millionaire, when that actually meant something.

So I suppose the point being, there are markets within markets. When Malcolm Fraser and the razor gang hit Canberra in the mid 70's, we moved on to the Sydney market and 'played' there for a while.

Which, oddly, is precisely the same I am saying about Invercargill atm - as an example how local factors can effectively lead to a local boom, even though the wider macro-fundamentals aren't good.

But thanks for the great example, MC.

M

 

[Michael Croft]

GSJ,

I can only repeat, 'the exception does not disprove the rule'.

It is a reasonable buy at this point in time, in a strategic location, showing a modest return (4.95%). No not good timing, but it is a punt based on a gut feel of what will happen to that area long term (20 years). If I've got it wrong, it won't have cost much, might even make reasonable cap growth. But if I've got it right and it's rezoned somewhere in the next 20 years, it'll do very nicely.

So it's probably another one for the grand kids I don't have yet.

MC

 

[JIT]

GSJ,

I can only repeat, 'the exception does not disprove the rule'.

Well, when you have a 'rule' like that you can't really go wrong can you?! Great line though, have to use it in another debate sometime.

It is a reasonable buy at this point in time, in a strategic location, showing a modest return (4.95%). No not good timing, but it is a punt based on a gut feel of what will happen to that area long term (20 years). If I've got it wrong, it won't have cost much, might even make reasonable cap growth. But if I've got it right and it's rezoned somewhere in the next 20 years, it'll do very nicely.

So it's probably another one for the grand kids I don't have yet.

MC

Hardly the talk of a timing lord !

GSJ

 

[plusnq]

Interesting thread. I might offer the argument that it isn't when or where to invest but how much...and how much leverage you use. There are always some identifiable good areas to invest whether your style be contrarian or momentum based. There are also good times when an asset class is clearly favored by the fundamentals eg low PE's (property or shares) and falling interest rates allowing the use of leverage with minimal risk.

I feel that the trick is in identifying the areas to invest and the appropriate time to apply leverage. Once an investment is identified it is about how much risk (leverage) to use and in my view, this is dependent upon the economic fundamentals. During periods when interest rates may rise and risk may entail additional holding costs, potential capital losses if marked to market, etc etc..then I don't want to be using too much leverage to magnify the potential downside to my investment portfolio. So in these conditions, I would be less aggressive with my investing and keep a lower LVR. I would still invest but be less aggressive about it.

When I do identify favorable opportunities for investing with minimal downside risk on an economic fundamental basis, then I apply leverage to attempt to maximise my returns. This is when I allow my LVR to rise substantially. That is why I have posted a bit here about market fundamentals... in part as caution to becoming too eager with leverage given my personal view of the economic data available.


Cheers

Shane

PS Usual disclaimer. Not advice. My wife and kids don't listen to me so why should you?