Ashfield 2131 = Bubble

Following from my last post Lidcome = Bubble the inner city suburb of Ashfield is in a big bubble that can not be sustained.

The subject property is 1A Brunswick Parade Ashfield.

The property is a 3 bedroom 1 bathroom 1 car house on 408m2 of land. The house presents very nicely and probably does not require any cosmetic work. It is an older art deco house approx 50+ years old.

The property sold on the 17th September 2013 for $1,200,000

Once settlement arrived it looks like the owners placed it on the market for rent at $820 - $850 (13/11/2013). It seems it didn't rent out so the price was lowered to $790 - $820. The property seems to have rented so in the below scenario I will give the owners the benefit of the doubt and snagged a tenant at $820.

Purchase Price = $1,200,000
Stamp/Legals = $53,490
Deposit $120,000

Current rent = $820 = $41,787 p.a.
Adopted interest rate = 5% = $53,498 p.a.

Rental Expenses:
- Agents rental commission @ 6% = 2,758
- Letting Fee = $820
- Council Rates = $1,500
- Water Rates = $500
- Insurance = $1,000
- Maintenance = $2,000 (conservative as this is an old house and structural issues will continue to appear)

Total Rental Expenses = $8,578

There won't be much depreciation

If the owner was on $150,000 income they would be paying $32,880 p.a. to hold this property, or $632 per week. Before negative gearing the amount is $42,554, negative gearing only gives them a $9,674 credit (hardly worth it).

The gross yield on this property = 3.48%
The net yield on this property = 2.77%

If you take into account opportunity cost, holding costs and the slow increase in maintenance I do not see this as a good buy/hold strategy. Ashfield is a beautiful place to live but with investors pushing the price of property up this will be one of those suburbs to fall back once there is an interest rate rise.

The reason I do this analysis is to give myself and hopefully others comfort in knowing these people are only buying these properties in hope of high capital gains to make any kind of return. I also like this type of analysis as it shows how negative gearing is not a major factor but the pure speculative nature of prices rises being the main factor for investors jumping into the market
 
Last edited:
Hi there,

Can you please explain to me how you came to the tax credit calculation?

I would have thought it would be (out of pocket amount) x (tax bracket %)
So in this case I would have thought the $40k amount that you give would be x (say) 30% which would give about $11k.

Maybe i'm wrong and don't understand the maths of it but would be interested to hear everyone's thoughts.
 
Hi there,

Can you please explain to me how you came to the tax credit calculation?

I would have thought it would be (out of pocket amount) x (tax bracket %)
So in this case I would have thought the $40k amount that you give would be x (say) 30% which would give about $11k.

Maybe i'm wrong and don't understand the maths of it but would be interested to hear everyone's thoughts.

Forgive my calculations there was an error where I had the incomes from two people not from one person. The amount is actually and you are correct:

$42,554 pre tax
$32,880 Post Tax

Negative gearing saving = $9,674
 
Preface: I don't think one can make assumptions on the state of an entire suburb based on a single sale and subsequent letting. Aim of this reply is to review the property as a singular investment.

----

Labrynth, first of all let me commend you on your approach. It's great to see numbers at work but there seems to be a couple of things that are left of field. So please let me ask a couple of questions to establish your rational:

Why did you base the calculations on a 10% deposit?

Why did you not go with the usual 20% which would be more appropriate?

How come you've not included mortgage establishment costs and LMI?

Why have you not factored in historic and predicted growth to ascertain ROI rather than cash flow?

Why haven't you deducted loan interest, it's $52,000 of deductions your missing?

----

The way this really property stacks up:

Price - $1.2m
Deposit - $240k
Gross yield (suburb) - 3.8%
Gross yield (specific) - 3.48%
Vacancy - 2%
Net yield - 2.81%
CG rate - 6%
Interest - 5%
Holding period - 10 years

Calcs based on avg income of $65k.

Loan - $1.037m (52k interest/annum)
Rent - $820/wk
Rental Expenses: 8k
Depreciation: 7.5k (assuming that the property was painted for sale and kitchen has been updated as evident in photos)
Total Deductions: 67.5k (interest, rental exp, depreciation)

Pre-Tax outgoings: -$18k
After Tax outgoings: -$9k
Outgoings/wk: $175 down to $40 in year 10

10 year value: $2.149m
10 year equity: $1.112m
10 year return: 14.82%

14.82% isn't fantastic but it's above the minimum total return so it looks like a sound investment to me.

Summary: This property in no way indicates that a suburb is in a bubble... It doesn't even represent a poor investment based on ROI. I'm confident there are many avg aussies that could afford $150/wk.
 
Decent house, good location, good sized block, so worth a premium. Owner might be renting it out while he gets a DA through - plenty of big, ugly, new houses around there.
Being Ashfield, there is a very good chance it's a Chinese buyer and they tend to throw lots of money around and aren't too fussed with yields and that sort of stuff.
 
@ Jake

Ty for reply.

The interest is included in the deductions. I didn't classify it as an expense, I will make a point to separate it for future posts.

The difference between 10% - 20% deposit is no more than $100 but I will take note to put that in my next analysis.

Properties of this type for the past year have been a selling for a similar price and rent at those levels. I am sure you can do a radius search on rp data and see for yourself.

Your ROI approach is basing future growth on previous returns. Without going off topic if u use previous growth rates you are practically saying that the strong growth of the past 20 years is going to continue which i think is a very foolish assumption to use when making and investment decision of this size.
 
I know what you're saying, but not everybody is punting on growth. The people on here are, but this is a teeny tiny subsection of property buyers. Some people have plenty of money behind them and just want to buy a house in the area they like. I agree that upon analysis it's a crazy buy, but not many people do any sort of analysis. They have some money, they find out how much they can borrow on top of that, and they go shopping.
 
Your ROI approach is basing future growth on previous returns. Without going off topic if u use previous growth rates you are practically saying that the strong growth of the past 20 years is going to continue which i think is a very foolish assumption to use when making and investment decision of this size.

You raise a good point Labrynth. Basing future assumptions purely on historic growth is silly. Thanks for pointing that out.

The growth assumption you refer is taken from the forecasts of RP Data and Residex economic reports which are then adjusted by averaging them against each other.

With that said I still think historic patterns have an important place when analyzing an area because they are factual. Using these proven stats as indicators, one can help one understand many aspects of a suburb. The more information someone has the more informed their investing decision should be :)
 
I know what you're saying, but not everybody is punting on growth. The people on here are, but this is a teeny tiny subsection of property buyers. Some people have plenty of money behind them and just want to buy a house in the area they like. I agree that upon analysis it's a crazy buy, but not many people do any sort of analysis. They have some money, they find out how much they can borrow on top of that, and they go shopping.

Quite right, well said!
 
Big assumption, that is.

No bigger than 5% interest rate over 10 years.

Put them together for 10 years with the benefits of gearing

6% CG
5% Interest
---------------

= boomtime

I don't think so:rolleyes:

Not to mention the 50% tax rate on a 65k income
 
Yeah I agree, interest rates are likely to go back up to the national average of 8% even though projections are saying 6%, 8 years from now...

Still... pretty sure the example with a few more of these considerations makes the same point. Ashfield isn't in a bubble :)

Tax was actually done at 32.5% ...Should put it up a bit but wanted to low ball
 
....Bubble the inner city suburb of Ashfield is in a big bubble that can not be sustained.
With respect, I disagree. See attached charts for CG last 15 years for Ashfield.

I've been hearing about "bubble" theories for about 20 years now......and it is getting kinda boring. The CG stats just don't support the idea of a bubble. (Unless you count a 5% drop in the year following the biggest RE boom we had. And if that is a bubble bursting, I think I and many others, can live with it). ;)

The subject property is 1A Brunswick Parade Ashfield.
One subject property does not make a market for an entire suburb. A valuer could consider this sale to be out-of-line.

The property sold on the 17th September 2013 for $1,200,000
Presumably at auction, which by definition is a fair and open market place. However, that does not mean that 2 emotional bidders may have pumped the price a but high. I'm not saying that's what happened (I di not attend this particular auction).

The gross yield on this property = 3.48%
The net yield on this property = 2.77%
As an agent said to me many years ago when I first started buying in the Inner West: "You don't buy in the Inner West for rental yield. You buy there for capital growth."

Ashfield is a beautiful place to live but with investors pushing the price of property up this will be one of those suburbs to fall back once there is an interest rate rise.
Really? :rolleyes:
You assume a lot. Of the 60 house sales made in Ashfield each year, how many are mortgaged? (there are lots of cash buyers). I could go on.....

.....but the pure speculative nature of prices rises being the main factor for investors jumping into the market
You call it speculation, others call it investing. Personally, I think the Inner West is a pretty safe bet (and history supports this view).

Just my 2c worth.
 

Attachments

  • AsfieldHouseChart.jpg
    AsfieldHouseChart.jpg
    53.1 KB · Views: 100
  • AshfieldHouseCG.jpg
    AshfieldHouseCG.jpg
    103.1 KB · Views: 94
Top