AUD 0.38 A question for NR

[nonrecourse]

Why wouldn't people pay a premium for new over old?

Remember, it wasn't too long ago when median house prices were less than half they are today, and building costs were essentially what are they today. People still built, because a new built house sold for more than the old established house (in the same area). It was worth more beause it was new. So the argument that if prices come down 50%, no one will build makes no sense. If the median drops to $250,000, then the land component becomes worth less. Hence over time this new cost will become reflected in new land sales.

So it's not as though if established houses halve in value, new house costs will be exactly the same as today. They will decrease because the land cost would decrease. Sure, it will cost more than $250,000 to build, and so should, but in a SANE world, a new house should be worth more than an old house (in the same area).

Maybe I'm missing the point, but as far as I understand, that was the way it always was until the recent speculative boom.

Hi Martin I gave you kudos for your post on exploding the myth that property doubles in value every 7-10 years using William the conquerors domesday book and 900 years of records. The 8th wonder of the world according to Einstein is compound interest and your right most people (including me) believed the myth that property keeps doubling over the centuries.

Your point about building costs however are incorrect. Some of it has to do with GST and the onerous planning laws. We looked at building a new house in double brick in 1998 that was ahead of its time and then we revisited those same plans recently.

In 1998 the quantity surveyor estimated construction would have set us back $380,000. In 2008 the cost had ballooned out to $917,000
The cost of materials and labour had trippled in ten years due in part to the overheating of the property market.

 

[Sunfish]

Why wouldn't people pay a premium for new over old?

I wouldn't. I like living in the "old" part of town. These new burbs are terrible.

 

[Patosan]

This is strange, if according to you banks are bending over to lend, why they are getting strict on how much they are going to lend you without a deposit?

http://www.smh.com.au/news/national/no-deposit-home-loan-on-way-out/2008/11/18/1226770451047.html

Well there's a credit crunch but the banks must lend to make money ... it's how they generate income. Who and how much they lend is tightening. i.e. they wish to reduce further risk ... but lend they must.

There was an interesting article on Jp tv news recently about how the banks here are throwing out their computer forms for loan applications and retraining loans staff on how to vet or qualify borrowers based on their feel for the borrowers ability to repay ... business prospects, etc.

 

[J Martin]

Hi Martin I gave you kudos for your post on exploding the myth that property doubles in value every 7-10 years using William the conquerors domesday book and 900 years of records. The 8th wonder of the world according to Einstein is compound interest and your right most people (including me) believed the myth that property keeps doubling over the centuries.

Your point about building costs however are incorrect. Some of it has to do with GST and the onerous planning laws. We looked at building a new house in double brick in 1998 that was ahead of its time and then we revisited those same plans recently.

In 1998 the quantity surveyor estimated construction would have set us back $380,000. In 2008 the cost had ballooned out to $917,000
The cost of materials and labour had trippled in ten years due in part to the overheating of the property market.

I was looking at project builders, who I understand provide the majority of new home builds these days, have led to no real significant increase in building costs compared to the early noughties when house prices were less than half they were today.

I agree about planning laws and charges are a significant input into the cost of land. Yet if you look at the costs, a massive input is the overinflated land values of the unimproved land itself, and developer margins. Land prices rising from 100,000 to 300,000 in a matter of a few years is not solely related to increased in council levies and charges.

Raw land prices are too high, and during any downturn in property prices, raw land will move down with it. The argument that people will stop building if house prices fall significantly only holds true if land prices stay at current boom levels, which I agree would make it unsustainable to build. I strongly believe they will fall if house prices fall.

 

[J Martin]

I wouldn't. I like living in the "old" part of town. These new burbs are terrible.

Couldn't agree more, neither would I. But there's still plenty of people who prefer the shiny new house over the old house next door.

 

[Rockstar]

Well there's a credit crunch but the banks must lend to make money ... it's how they generate income. Who and how much they lend is tightening. i.e. they wish to reduce further risk ... but lend they must.

I think you will find that it's not the really banks deciding this. It's the mortgage insurers who are pulling the strings - especially when it comes to lo and no doc products. Those loans would still be fully available if the insurers were insuring them.
The banks will still be lending what they can - it's just been restricted somewhat.

 

[LynnH]

I wouldn't. I like living in the "old" part of town. These new burbs are terrible.

I agree completely, Sunfish! McMansions on pocket-handkerchief size blocks of land - where you can almost reach out the window and touch the house next door - are my idea of an absolute nightmare!

Cheers
LynnH

 

[BayView]

Well it has happened, although it was in rural areas. Probably irrelevant really to capital city property, but I will bring it up anyway.

Smaller towns near me before we had our property boom in 2003, would have been selling for say 80 to 100 k. The bricks and morter replacement value would have been say 160 k. The house was way below replacement value, and the land was valued as worthless.

The boom started in 2003 once Sydney topped out and commodities started moving, and in 2 or 3 years these houses had more than doubled.

See ya's.

I would call any investing in rural areas as speculative.

Little cap growth (historically, not much likelihood of any serious amount in the near or medium term), so you are hoping for good rent yields and lots of renters to back that up.

For me, an area must have at least 20k of people to even click my mouse on that area.

 

[BayView]

Why wouldn't people pay a premium for new over old?

Remember, it wasn't too long ago when median house prices were less than half they are today, and building costs were essentially what are they today. People still built, because a new built house sold for more than the old established house (in the same area). It was worth more beause it was new. So the argument that if prices come down 50%, no one will build makes no sense. If the median drops to $250,000, then the land component becomes worth less. Hence over time this new cost will become reflected in new land sales.

So it's not as though if established houses halve in value, new house costs will be exactly the same as today. They will decrease because the land cost would decrease. Sure, it will cost more than $250,000 to build, and so should, but in a SANE world, a new house should be worth more than an old house (in the same area).

Maybe I'm missing the point, but as far as I understand, that was the way it always was until the recent speculative boom.

New usually sells for more than the old in an area. But what is old?

Some people do pay a premium for new over old. But after 12 months, it's second hand, and basically the same value as the 5 year old version.

They often get creamed in these sorts of climates though if they have to sell; especially if they buy at the top of the boom, which many people do. They take a while to decide to buy and make sure the time is right by checking to see what the rest of the sheeple are doing. But by that time often it is too late; they've paid top dollar at the wrong end of the cycle.

So, if you saw a house in the same street, exactly the same as the one you would like to build, and a block of land came on the market today that would allow you to build it, but it was gunna cost another $100k more than the existing one, with it's established gardens etc, you would still do it?

The critical factor is the land value. If a house is selling for $400k, and a similar block of land is selling down the road for $300k, and the house on it would cost $200k to build, then it doesn't add up to build a brand new house for $500k when the same house, albeit a few years older is selling for $100k less.

You may get the land a bit cheaper, but the cost of the building isn't going to drop much, if at all.

Many people do this, and as long as they don't need to sell in the short term there's no problem, as over time, the costs will level out between the newer and the older.

It's the forced sale in a short timeframe after purchase that kills these people, and makes the prices look like they've tanked big time - this is what is happening in many parts of the world right now.

 

[J Martin]

New usually sells for more than the old in an area. But what is old?

Some people do pay a premium for new over old. But after 12 months, it's second hand, and basically the same value as the 5 year old version.

They often get creamed in these sorts of climates though if they have to sell; especially if they buy at the top of the boom, which many people do. They take a while to decide to buy and make sure the time is right by checking to see what the rest of the sheeple are doing. But by that time often it is too late; they've paid top dollar at the wrong end of the cycle.

So, if you saw a house in the same street, exactly the same as the one you would like to build, and a block of land came on the market today that would allow you to build it, but it was gunna cost another $100k more than the existing one, with it's established gardens etc, you would still do it?

The critical factor is the land value. If a house is selling for $400k, and a similar block of land is selling down the road for $300k, and the house on it would cost $200k to build, then it doesn't add up to build a brand new house for $500k when the same house, albeit a few years older is selling for $100k less.

You may get the land a bit cheaper, but the cost of the building isn't going to drop much, if at all.

Many people do this, and as long as they don't need to sell in the short term there's no problem, as over time, the costs will level out between the newer and the older.

It's the forced sale in a short timeframe after purchase that kills these people, and makes the prices look like they've tanked big time - this is what is happening in many parts of the world right now.

I agree with most of what you said, and any disagreement I have is simply a matter of degree. The nearly new market is an interesting submarket and I can certainly see that market being affected adversely during a downturn, partly because they bought land at peak prices.

That said, I simply believe that the new land price will come down to reflect the new lower market(within reason). Or no developer will sell any land. Hence, unlike some people, I don't see this as a barrier to falling prices. So yes, a premium of $100,000 in your example would in most circumstances see the buyer buy the 5 year old house, but as land prices drop, that premium would erode. There is obviously a raw land price where developer profitability hit's 0, and this would vary amongst developments.

 

[quoll]

http://www.news.com.au/business/money/story/0,25479,24679779-5013951,00.html

"AUSTRALIA'S house prices will soften but should not crash because of the world economic crisis, Reserve Bank governor Glenn Stevens says."

I think we are pretty close to having everything predicted so at the end of this someone will be proved correct.

Regards
Graeme

 

[james_w]

so you predicted the sharemarket would fall 3500 back in AUG/SEPT

so did you take advantage since you were so sure of your prediction and if so what are you doing here and not off in your private jet?

I also don't understand how all houses across the board could drop 40-70%

with low interest rate and high yields wasn't the interest rate in double digits in 1988 and low yields?

The share market has dropped below 3500 as I correctly forecasted back in August/September. The last time the market crashed 1987 we were a young married couple on one wage with me studying full time with a large home mortgage and an investment unit. We sold the unit in early 1988 because we could see what was coming. We paid off some of our debt and allocated a reserve for the bad times. By 1991 many "property investors" lost their investment properties because they were unwilling to adjust.By 1993 we were back in the market when property investors were thin on the ground.

History has a habit of repeating itself. Those that are arrogant and refuse to recognise investment cycles are brought down by an inability to refinance when the perfect storm hits. This cycle is a super cycle. We have had 16 years of unprecedented growth. Since before the last great depression there has not been a period like it. Why would anyone doubt that an equal and opposite correction is not upon us. No asset class is immune to the vagaries of the irrational market when as now it occurs.

 

[nonrecourse]

so you predicted the sharemarket would fall 3500 back in AUG/SEPT

so did you take advantage since you were so sure of your prediction and if so what are you doing here and not off in your private jet?

I also don't understand how all houses across the board could drop 40-70%

with low interest rate and high yields wasn't the interest rate in double digits in 1988 and low yields?

Sigh Your posting sneer reeks of a terminal case of tall poppy envy. Rather than closing your mind why not go back through my earlier posts and you just.... might learn what I am really on about.

I am a long term property investor. We have nothing in the share market. My passion is property investing through trusts and super structures. Just because I was sure of what was going to happen.... I'm not a speculator because that is what you are suggesting I "should" have done.

I didn't say all houses are going to drop 40-70%. I said residential real estate will drop from 40-50% and commercial property up to 70%.

I'm not surprised you cannot understand how it could fall so much. There is a lot of share investors until 4 weeks ago would have said the same about their investment preference. With the lack of reason in the market no asset class including property is immune from those sorts of price corrections.

 

[james_w]

Sigh Your posting sneer reeks of a terminal case of tall poppy envy. Rather than closing your mind why not go back through my earlier posts and you just.... might learn what I am really on about.

I am a long term property investor. We have nothing in the share market. My passion is property investing through trusts and super structures. Just because I was sure of what was going to happen.... I'm not a speculator because that is what you are suggesting I "should" have done.

I didn't say all houses are going to drop 40-70%. I said residential real estate will drop from 40-50% and commercial property up to 70%.

I'm not surprised you cannot understand how it could fall so much. There is a lot of share investors until 4 weeks ago would have said the same about their investment preference. With the lack of reason in the market no asset class including property is immune from those sorts of price corrections.

so your a long term property investor I have read the whole thread mate

lol @ tall poppy envy I understand that property goes up and down as a matter of a fact property is always up or down 10% depending where and when you buy

sorry I am an longterm investor properties,shares,currency, service businesses

ever of heard don't put all your eggs in one basket?

as for your prediction I have seen several posters ask you why properties will fall 40% sure if mines started closing up shop etc I could see them areas with high rents and inflated prices fall back to there real values wich could be 40% or more but at the moment those areas are undersupplied and high demand

interest rates are low and makes more sense to buy then rent but alot of the population still wont buy and why would they when they can still rent at a half reasonable rate something breaks LL has to pay for it

as for your reasonings for properties falling 40% you say ...SOFT DEPRESSION...

hmm I thought we already had a soft depression so other then what others are ranting about this soft depression saga what is your real based foundation

for properties falling 40% maybe your just sitting with your warchest waiting for us investors to believe you so we all go and sell our properties at a loss and you can pick up some bargains don't sit on the fence to long market is already flat and has been for a quite awhile but more people are buying becuase of cheap interest and seemingly cheap house prices compared to the boom so these new home buyers that just got a 14-26k shot in the arm are going to sell at 40% loss when there now paying cheaper then rent in some circumstances?

supply+demand+lowIr= 40% drop

p.s it wasn't a snear it was more of good on ya if ya did for someone that doesn't care about shares why would you even bother making a remark like I predicted the 3500 drop in shares months ago if I had this prediction and was 90% sure I would of shorted and paid out some debts I sure as heck wouldn't be gloating about it on a investment forum.

 

[nonrecourse]

so your a long term property investor I have read the whole thread mate

lol @ tall poppy envy I understand that property goes up and down as a matter of a fact property is always up or down 10% depending where and when you buy

sorry I am an longterm investor properties,shares,currency, service businesses

ever of heard don't put all your eggs in one basket?

as for your prediction I have seen several posters ask you why properties will fall 40% sure if mines started closing up shop etc I could see them areas with high rents and inflated prices fall back to there real values wich could be 40% or more but at the moment those areas are undersupplied and high demand

interest rates are low and makes more sense to buy then rent but alot of the population still wont buy and why would they when they can still rent at a half reasonable rate something breaks LL has to pay for it

as for your reasonings for properties falling 40% you say ...SOFT DEPRESSION...

hmm I thought we already had a soft depression so other then what others are ranting about this soft depression saga what is your real based foundation

for properties falling 40% maybe your just sitting with your warchest waiting for us investors to believe you so we all go and sell our properties at a loss and you can pick up some bargains don't sit on the fence to long market is already flat and has been for a quite awhile but more people are buying becuase of cheap interest and seemingly cheap house prices compared to the boom so these new home buyers that just got a 14-26k shot in the arm are going to sell at 40% loss when there now paying cheaper then rent in some circumstances?

supply+demand+lowIr= 40% drop

p.s it wasn't a snear it was more of good on ya if ya did for someone that doesn't care about shares why would you even bother making a remark like I predicted the 3500 drop in shares months ago if I had this prediction and was 90% sure I would of shorted and paid out some debts I sure as heck wouldn't be gloating about it on a investment forum.

James you have a serious attitude problem that I can't help you with. Have a nice life

 

[james_w]

Hmmm, no... your quotes below are what I would call baiting and ridicule...

Originally Posted by nonrecourse

you just can't get your head around the fact

you believe in fairy tales

Your approach is little bear number one

pareto's law is about to kick 80% of SS investors in the teeth

you will find yourself up a very nasty creek without a paddle

your inane nonsense

You have contributed nothing of value to the discussion

your [sic] a wannabee [sic]


Anyway, I get it - I can see your anger and frustration coming out in your last few posts so I will stop asking you these hard questions, I realise you can't answer them. I guess we'll all just have to trust you...

(I'm a 'wannabe' what by the way?)

Cheers,

Shadow.

James you have a serious attitude problem that I can't help you with. Have a nice life

I am sorry you feel I have an serious attitude problem but when someone says my properities are going to drop 40% that's a big drop in real terms.

so I am sorry that I want to know the reason my properties would fall through the floor so to speak not that I am that worried as I only have 50% lvr anyway

 

[Shadow]

so I am sorry that I want to know the reason my properties would fall through the floor so to speak not that I am that worried as I only have 50% lvr anyway

Good luck ever getting any sensible reason from NR. His answer to everything is ... SOFT DEPRESSION ... apparently it needs no further explanation. We must all simply ... BELIEVE HIM ...

 

[nonrecourse]

It seems that some people cannot recognise history in the making. They are fixed on the rear view mirror of life's recent past. Ignorant of history and quick to ridicule when their view of conventional wisdom is challenged.

Life is forever changing. Those who refuse to adapt are quickly left behind to wallow in mediocrity. Success in life as in investing is not about being right, its about watching, listening and learning. Forever revisiting core beliefs, challenging them and adapting them to their new enviornment.

Shooting the messanger and cutting down tall poppies are renowned aussie past times. Like the sydney opera house architect John Utzon; it is better to put in place your vision and then move on. The rear view gazers will initially deny, then personally attack you and then in the fullness of time claim the idea as theirs, central to their conventional wisdom.

C'est la vie.

 

[Rockstar]

Life is forever changing. Those who refuse to adapt are quickly left behind to wallow in mediocrity.

Shooting the messanger and cutting down tall poppies are renowned aussie past times.

C'est la vie.

So you are a tall poppy now NR? Why didn't you say so in the first place? Then we would have believed everything you have said from the start!!

Why was I so blind to it why could I hardly see
The soft depression coming, that NR was showing to me
My mind was always sheltered in mediocrity
While the world slipped by and passed my eye and the truth I didn’t see

Rockstar - The Change

 

[nonrecourse]

Success in life as in investing is not about being right, its about watching, listening and learning. Forever revisiting core beliefs, challenging them and adapting them to their new enviornment.

.

It seems you have difficulty understanding the reality of history in the making even when it stares you in the face.

http://money.ninemsn.com.au/article.aspx?id=670483

The downward spiral in the world credit markets has only begun. You cannot reason away reality and the tragic events that continue to unfold. Six months ago you could argue that I was being extreme in my view. Now it is "you and the property will never drop in value crowd' that need to prove that your position is rational.