just thought i'd break the intensity.
Are Australian property prices going to crash?
- Thread starter internext
- Start date
just thought i'd break the intensity.
Hi all,
Using Deltaberry's methodology but with more realistic figures, we have the following, where:
"Previously" is the average investing situation in time gone by (say last 20 years)
"Current" is my take of current conditions
"Future" is my dab into the unknown.
..........................................Previous.........Current.........Future
Gearing....................................90%.............80%...........70%
Interest rate (%)......................10.................7.5.............8
Rent (gross yield %)..................5..................4...............3.5
Renting cost (%).......................1..................1................1
Net return (%).........................-5.................-3..............-3.1
Net return after tax (%)...........-2.75............-1.65..........-1.7
Asset doubles in value (years)....7..................10..............12
CG per year (%) .......................10.4..............7.2.............5.9
Return on asset (%)..................7.65.............5.55...........4.2
Return on equity (%)................76................28..............14
Note that ROE fluctuates wildly as soon as you play slightly with the numbers.
"Future" ROE of 14% is much lower than in the past but still healthy. IMO it's where ROE should be in normal conditions allowing for a premium of 8% for risk over cash deposit.
"Previous" ROE seems too good to be true (although many investors have experienced that, including myself) and can't go on indefinitely.
Please also note that above ROEs are only valid for the first year. As time progresses, CG is realised while interest payment stays the same, it will go up. In the "Future" scenario, ROE will shoot up to over 35% after 12 years, which is very worthwhile.
Truong
Using Deltaberry's methodology but with more realistic figures, we have the following, where:
"Previously" is the average investing situation in time gone by (say last 20 years)
"Current" is my take of current conditions
"Future" is my dab into the unknown.
..........................................Previous.........Current.........Future
Gearing....................................90%.............80%...........70%
Interest rate (%)......................10.................7.5.............8
Rent (gross yield %)..................5..................4...............3.5
Renting cost (%).......................1..................1................1
Net return (%).........................-5.................-3..............-3.1
Net return after tax (%)...........-2.75............-1.65..........-1.7
Asset doubles in value (years)....7..................10..............12
CG per year (%) .......................10.4..............7.2.............5.9
Return on asset (%)..................7.65.............5.55...........4.2
Return on equity (%)................76................28..............14
Note that ROE fluctuates wildly as soon as you play slightly with the numbers.
"Future" ROE of 14% is much lower than in the past but still healthy. IMO it's where ROE should be in normal conditions allowing for a premium of 8% for risk over cash deposit.
"Previous" ROE seems too good to be true (although many investors have experienced that, including myself) and can't go on indefinitely.
Please also note that above ROEs are only valid for the first year. As time progresses, CG is realised while interest payment stays the same, it will go up. In the "Future" scenario, ROE will shoot up to over 35% after 12 years, which is very worthwhile.
Truong
My personal opinion FWIW is that the Australian market is going to stabilise and become more “mature”. Long term, prices will still rise but only at a fraction above household disposable income due to an immigration rate that will stabilise too.
The booming conditions of the past two decades have been a boon for speculation which in itself is not healthy. We're now going through tremendous change whereby:
- in future only investors with the right knowledge and skills will be able to make a worthwhile profit as is the case in other types of investment.
- the mums and dads (not being derogatory here, I was one of them
) who have made huge profits in the past without a lot of market knowledge will not continue to do so. Either they will exit the market or will hold on their IPs oblivious of the fact they are making very little money.
- the speculators will get out when the quick money dries up.
I see the changing conditions as a very good thing – a cure of much needed wisdom. The Australian market over the decades went through a kind of bubbly adolescence that was meant to end someday.
Looking to the future I’m still buying...
Truong
PS - English isn't my first language either so I hope you can read my writing.
The booming conditions of the past two decades have been a boon for speculation which in itself is not healthy. We're now going through tremendous change whereby:
- in future only investors with the right knowledge and skills will be able to make a worthwhile profit as is the case in other types of investment.
- the mums and dads (not being derogatory here, I was one of them
) who have made huge profits in the past without a lot of market knowledge will not continue to do so. Either they will exit the market or will hold on their IPs oblivious of the fact they are making very little money. - the speculators will get out when the quick money dries up.
I see the changing conditions as a very good thing – a cure of much needed wisdom. The Australian market over the decades went through a kind of bubbly adolescence that was meant to end someday.
Looking to the future I’m still buying...
Truong
PS - English isn't my first language either so I hope you can read my writing.
wylie - I was asking the question generally... just getting people thinking. Anyway it's all about your assumptions and I think if you run your buy analysis on say 10-12 years to double that's alright. I'm not a big fan of people telling me it doubles in 7 years
If I was to fault this, I'd say you will be way out on the future gross yield forecast. There aren't many times in history or countries where the gross rental yield has remained below 5% for too long. So to predict 3.5% seems very low.
I'm estimating a return to around 8% yield over the next few years as I don't believe banks will finance for anything less.
There are TWO ways gross yields can get up to 8% and rising rents is but one of them.
Look as I said, the reason I put the analysis up was to show people one way of looking at is is to predict for the worst.
If you're comfortable with 14% ROE given 70% gearng, 7% interest rates, 3.5% yields and 12 years to double, then that's fine.
However the only thing is I'd still say if you want to be comfortable you'd go with 80-85% gearing (otherwise the cash requirement for investing is too big) and 8% interest rates. How does that affect your ROE? Cbf (ie can't be ***** for the older generation) punching calcs as got work to do.
If you're comfortable with 14% ROE given 70% gearng, 7% interest rates, 3.5% yields and 12 years to double, then that's fine.
However the only thing is I'd still say if you want to be comfortable you'd go with 80-85% gearing (otherwise the cash requirement for investing is too big) and 8% interest rates. How does that affect your ROE? Cbf (ie can't be ***** for the older generation) punching calcs as got work to do.
Well said. Anyway that's one reason I am happy to look at 10-12 yrs doubling as that's long enough to ride out the other way in which yields go up ^_^
- in future only investors with the right knowledge and skills will be able to make a worthwhile profit as is the case in other types of investment.
- the mums and dads (not being derogatory here, I was one of them
- the speculators will get out when the quick money dries up.
I couldnt agree more with this. A few people might get a bit of a surprise when what they were doing doesnt work for them in the future.
why do i get the horrible feeling that soon we will be told property doubles every 14 years, not 7, nay 10? these years are like a builders timeframe
it would be more accurate to say... we have had various price shocks over the last 30 or 40 years so if we average that then hopefully that average continues
it would be more accurate to say... we have had various price shocks over the last 30 or 40 years so if we average that then hopefully that average continues
Hi Sunfish, English is not my first language but I can too read & write.
Didn't you write "property is the only game where you can lose 40%..."
I'm merely asking you since when did property lose 40%?
And don't tell me the ninja loans of the US of A.
KY
Didn't you write "property is the only game where you can lose 40%..."
I'm merely asking you since when did property lose 40%?
And don't tell me the ninja loans of the US of A.
KY
It seems you read my words but missed my meaning. The full quote was "property is the only game where you can lose 40% and still win". The next bit was a reference to my local football team which "only" lost by 4 pts on Saturday. Nowhere did I infer that I had lost 40% on a deal.
The investors here are saying that Keen is wrong and that property will not fall 40% and take comfort in this. I see nothing comforting in it at all. Prices falling "only" 20% would be disastrous for most here.
I was being "tongue in cheek".
From Wikipedia, the free encyclopedia
Tongue-in-cheek is a term used to refer to humour in which a statement, or an entire fictional work, is not meant to be taken seriously, but its sarcasm is subtle. The Oxford English Dictionary defines it as "Ironic, slyly humorous; not meant to be taken seriously".
Truong, back of the envelope calcs have their blind spots.
Every IP has in costs.
1% hold costs are very optimistic.
after tax -CF increases equity in the deal.
Doubling every 12 years is 6%pa growth....for 20 years!!!
Maybe achievable, maybe not.
There's heaps of regions that are still under pre-GFC prices.
One of the reasons I've been developing xls to explore breakevens, is because there's not going to be as much lazy 'credit money' or spare Aussie debt serviceability floating around making the markets so inefficient.
This will strengthen the case for timing the market. Putting cash into a passive investment that can't beat cash for 5-8 years, makes timing all the more attractive.
The other option is to be an active investor, and intelligently pre-empt zoning changes.
Hi WW
You may be aware that it's salary review time ATM for many companies for the new FY. As a result I have been reading the salary guides from a number of different HR firms to get a feel for how things are going. What I can certainly say is that for the limited number of industries I have visibility of for this purpose, average salaries are going up by significantly more than that amount this year...
Of course at the same time last year nobody got a pay rise. But the year before that...
I am also aware of ABS aggregates in this area which would not correlate with this story so, much like the situation with CPI, I don't know who to believe!
Mind you, with CPI, above average growth in asset prices is entirely consistent with below average growth in the price of goods (courtesy of China) as that new-found discretionary income (salaries have outpaced inflation in this period) gets spent on our favourite housing etc...
Of course the reverse is also true so I'm not convinced inflation in the price of goods (and salaries lagging) is at all good for property prices. But inflation in Australia also seems far less likely than it does overseas so I'm not overly worried.
Fortunately HE, I'd had a few sav blancs when I read your post so it made sense.
I agree with your insight that you are more likely familiar with wage rises in a specific sector, unrepresentative of the services sector that comprises 65-70% of gdp.
You have prompted an interesting question in my mind.....the correlation between cpi and wage price/index growth
I'll have to do a long term chart of the relationship.
Fortunately HE, I'd had a few sav blancs when I read your post so it made sense.
I agree with your insight that you are more likely familiar with wage rises in a specific sector, unrepresentative of the services sector that comprises 65-70% of gdp.
Also worth noting is that Fair Work Australia (what a name...
) just raised the minimum wage by 4.8%.Not all that far off your 7.2% in the midst of a worldwide economic mess just for the base line. With fewer people than ever sitting on the minimum wage and extra low unemployment, there are a few factors at play...
And you are confident that a government, socialist enough that it can castrate the industry that has kept us thriving and then saddle the REST of industry with this wage rise (because we are thriving) is, at heart, still free enterprise enough to allow landlords free reign?
I have this little bridge you may be interested in. LOL
I have this little bridge you may be interested in. LOL
