Crash Imminent?

If a house is 80% over valued then it's "true value" is really 20%, for example if a 1m house is "truly valued", it's real value is 200k

That's not correct. Do a simple check, according to your calcs the true value is 200k and current value is $1m.

That puts current value 400% higher than where it should be not 80%

Prices being 80% overvalued is not the same as th3 price should be 20% of what it currently is
 
But he got $160k for nothing. Probably works out well in the end.

Anyway, a lot of people debate a lot, but never quite do anything.

Yeah but she went to buy a 2.5 million home as a PPOR and gunning on the funds from 1.6 million. probably should have bought it after settlement.
 
Current price = $5 million, not on market and so is not tested.
True price is said to be actually 20% of it.
So, true price = 0.2 x 5m = $1m

But, if the statement is that true price has been inflated by 80%
Then, the formula is
True price + 80% True price = $5m
True price (1+80%) = $5m
1.8 True price = $5m
or True price = $2.78 m

The figure depends on how the statement on percentage is made.
 
If houses are 80% overpriced, then a $1m house is only "worth" 200k... which is less than the cost to build it.
It happened in the USA.

Bought properties there at $20-24 per square foot. Replacement build cost was more like $60-80 per square foot. Thus purchase price was a 1/3 of replacement costs.

Bought my factory back in 1995 in Padstow at a little less than the build cost at that time. Accountant couldn't believe it.

We also have the examples by Joanmc around Cabolture and Morayfield.

Australia is not immune to a correction but in general our correction is that our market in the main stagnates. If you bought well who cares as the cash flow will carry the property. If you didn't buy well you may suffer.

It is the proportion of those that are suffering in the market place that will determine the size of a correction as they are forced to sell into a falling market. I suspect that the China factor will deterrmine the size of any fall as they maybe forced to leave our shores as the Japanese did and as other Asian purchasers did subsequent to the Asian Crisis.

Cheers
 
That 14x rent thing is interesting. I live in an inner west house in terrible condition. 14x the rent is actually quite a lot higher than the market value for the property, without any allowance for the fact that it is within 500m of basically everything.

This is possibly one of the reasons I would like to buy a similar property ...

The catch of course is its a commercial property and you need 20-30% down and stamp duty up front. The commercial part of my place was empty for about 3 months when I first moved here, which would have dropped the rent here from 80Kpa to barely 50k. Yay commercial vacancy risk.
 
Being a bean counter - he has lived through crashes of the USA and Ireland. He reckons Australia's houses in (especially Sydney/Melbourne) are 80% overpriced.

He reckons taking a simplified approach, the base worth of a house is $X rental per year x 14 then add factors such as proximity to CBD, good schools etc to get a net worth. Very arbitrary numbers, however....e.g. +$50K for being near a good school, +$100K for being within 10km of CBD etc.

The rationale behind your bean counter friend is simply this:

- "normal" yield should be 7%, therefore "normal" price should be 14 times the rent (1/14=0.07)

- average yield in Australia is 4% currently, therefore to bring it up to 7% prices need to be divided by 1.8 (4 x 1.8 = 7). Thus current prices are 80% overvalued.

It's a rather simplistic theory based on questionable assumptions, being that residential prices are largely determined by yield and that there is an ideal yield (7%) that the market always goes back to.
 
It's a rather simplistic theory based on questionable assumptions, being that residential prices are largely determined by yield and that there is an ideal yield (7%) that the market always goes back to.

Well it's yield that pays your IP overheads, so ever lower yields can't be a good thing for cash flow. As prices in some areas continue to well outstrip wage growth, which is closely linked to tenants' rent capacity, it looks like associated yields may continue to deteriorate in future. This is going to make it even harder to find CF positive properties in such areas in future, which means investors having to tip in more of their own (fortunately tax-deductible) money. Hopefully, the CG fairy will continue to smile good fortune on property investors to make up for these losses.
 
l thought they'd crash for sure even 4 5 yrs ago .We are ridiculously priced compared to just about anywhere else l reckon but eh , they do keep on going somehow. Pretty amazing really.

l've noticed a lot of regional areas did drop back a lot, some are 50% , 30 or 40 but city is going off again. l can't even see how that's poss' at the prices but eh , keeps happening .

You hear a lot about interest rates being so low for our standards and that's what's keeping it going.

I'm hoping things up my way take a dive so that l can buy something ridiculous .
The asks are still very cheeky but apparently people are a lot more willing to deal now .
 
Well it's yield that pays your IP overheads, so ever lower yields can't be a good thing for cash flow. As prices in some areas continue to well outstrip wage growth, which is closely linked to tenants' rent capacity, it looks like associated yields may continue to deteriorate in future. This is going to make it even harder to find CF positive properties in such areas in future, which means investors having to tip in more of their own (fortunately tax-deductible) money. Hopefully, the CG fairy will continue to smile good fortune on property investors to make up for these losses.

Sure, yield has a role to play but no more than other factors such as supply and demand, capacity to service, interest rates, taxation and government policies, overseas money, etc...

As for the 7%, markets around Australia have lived very happily with various yield levels for a long time with no inclination to go back to a fixed number whatever that number may be.

But you're right in saying there's a relationship between the trend in CG and acceptable yields. The more CG is expected, the lower yield people will accept. When CG slows down yields have to go up to make investments still worthwhile. But this happens naturally anyway.
 
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