BIS Shrapnel Growth Predictions

[always_learning]

From: Always Learning


I noted in Michael Yardney's Metropole Properties June Update (excellent read btw), some 3 year median house growth rate predictions given by BIS Shrapnel, for the following capital cities: <p>

<ul>

<li> Brisbane -27%

<li> Darwin -24%

<li> Sydney -22%

<li> Perth -16%

<li> Melbourne -13%

<li> Canberra -11%

<li> Adelaide -6%

<li> Hobart 6%

</ul>
( Now in my thinking these negative numbers may just be a typo and that all growth will be positive, which to me makes some logical sense)
<p> I don't have access to the report, but for someone interested in purchasing a large chunk of IP next year, any hint of possibly "owning" negative equity is a little alarming for me.

<p> Does anyone know on what basis BIS Shrapnel made these predictions?

<p> BTW From this prediction if Sydney falls 22% but Melbourne falls only 13% this would mean that Melbourne (with a current median price just under Sydney) would be the most expensive city (property wise) in Australia, which to me is a little odd, given Sydney's land scarcity, bigger population and overall greater wealth.

 

[WebBoard]

Reply: 1
From: Jye Walker


Hi AL,

Its a definite typo. Exact same numbers (but positive) are quoted by BIS Shrapnel in this months API. They are forecast in BIS Shrapnels report "Residential Property Prospects 2002-2005". BTW, good to see some good news on the horizon for Brisbane investors (havent we heard that before???)

JW

 

[WebBoard]

Reply: 1.1
From: A Jones


Is a 22% return (for Sydney)or 27% (for Brisbane) over 3 years that special?

If interest rates average 7% p.a. over the next 3 years these gains do not look that promising. They look very average for Hobart and even Melbourne.

 

[always_learning]

Reply: 1.1.1
From: Always Learning


Well if interest is 7% then 3 years compound is a gain of 22.5%.
Thus Sydney increases are actually just below interest rates.
<p>
So can I just ask for opinions on a hypothetical situation:
<p>
<ol>
<li> Lets say I buy $2M worth (that's 4 500K IPs)in Sydney.
<li> At the end of the 3 years I have 2.44M worth of property. A gain of 22% : $440K
<li> I need consider holding costs: interest+repairs+insurance+rates+agents fees = 9.0% P/A or $540K over 3 years.
<li> Then I need to consider Sydney's poor rental return=4.5% or $270K gross over three years
<li> Thus holding costs $540K-$270K = $270K over three years.
<li> "Luckily" the tax man pays 50% leaving me to pay a mere ($135K over 3 years) or $45K a year or even less if I consider deductions for deprecation. Yes, I know I would need a lowish 6 figure income!
<li> Thus I have a net gain of $440K-$135K = $305K or $101K per year. That isn't so bad is it?, I can really get excited about it actually. There is no way I could "save" $101K per year!
</ol>
But if I buy well (getting better capital gains eg. 9%PA ) and do a little bit of renovation so I can boost yields eg.to 5%, my net worth would moving forward ( and gaining momentum ) at $145K/year.
<p>
So the big problem is supporting the holding costs! Or finding a better plan!
<p>

 

[Tibor]

Reply: 1.1.1.1
From: Tibor Bode


AL,

I also read the BIS report and while they are reputable, I am having some difficulty accepting their forecast.
On the commonsense basis (my opinion only) using affordability, end of increased FHOG, interest rate increases, aging population, Increase of single households, etc. I am having some difficulty accepting their results especially for Sydney and Melbourne. Who will be the buyers who en mass will be paying more and more? In Guildford (real working class suburb in Sydney west) the entry house price is 300K! 10% deposit 30K plus 6% expenses 18K (not sure that it will sufficient to cover it) means that it is almost 50K people will need to put down just to get in the door! At 8% the interest component is $21600 from after tax, the P&I repayment over 25 years would be $2083 after tax, which would require about $31000 gross per annum which supposed to be the 30% for servicing purposes. So our average couple has to earn 93K per annum.
And these figures as of today, not after the projected 20% increase in 3 years time! I also read that after the current increase the australian housing PE ratio (average income vs average house price) is at an all time high around somewhere 8. Someone posted an article about the UK where it was over an extended period somewhere in the 3.8 and 6.8 or similar range. It seems to me that the housing PE is just like some of the tech PEs (albeit not as bad) in March 2000.
Of course I can be wrong, but this growth theory in these 2 cities does not quite make sense to me.

Tibor

 

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Reply: 1.1.1.1.1
From: Neil Iffland


Uh oh. If BIS Shrapnel forecasts price increases then I'd expect falls.

They always seem to get it wrong. They forecast 5% falls in Sydney residential market in 2001 calendar year.

 

[Michael Yardney]

Reply: 1.1.1.1.1.1
From: Michael Yardney


Sorry for the confusion in my newsletter
The numbers were not negative the hyphens were tab marks and BIS Schrapnel predicted +ve growth.
I only reported what they said. I also openly acknowledge the point that they got the 1987 crash right in there predictions and have been off the mark ever since. Each year they do an annual review and prediction for the next 3 - 5 years and it is always interesting to pull out their figures one year later and see how right or wrong they were.
That's probably why there are NO economists in the BRW rich 200 list.
Michael Yardney
Metropole Properties