First Post - D Koch's comments this morning

[MarkandTina]

I'm very happy to have been shown this forum, I have enjoyed reading the various opinions on it to date.

I was watching the Channel 7 breakfast show this morning and they were talking about fuel prices, truckie blockades in Frances, Bulgaria etc and David Koch mentioned how in real terms fuel prices are now similar to those during the oil crisis (in the 70's). He commented that the high fuel prices triggered the rise in inflation which lifted interest rates to 17% and that it took 20 years for that to wash itself out of the system.

As someone who owns 95% of their own home and is looking to using the equity to buy IP's, these comments made me stop and think about the big picture.

Do I wait and see if we do get 10% inflation, 15% interest rates and then enter the market when prices have bottomed out. While the oil crisis in the 70's was resolved, with us allegedly passing peak oil is there a chance the fuel prices will continue to rise at the current rate, causing significant inflation over a longer period than in the 70's. Is it possible that the cycle we have seen over the past 70 years will be replaced by a different one? Maybe I just have to make sure I invest near the city with good access to bus routes and bike paths

Apologies for such a negative post for an initial one but I was midway through Jan's book and gung-ho about getting into the market until I gave some thought to what was said this morning, and I'm interested in others opinions of it.

Maybe I'm just letting fear get the better of me.

 

[stumunro]

Hi, Welcome!

It's great to see your interest in property, and your eagerness to purchase. A good strategy with an economic forecast like we have is to ensure you have enough buffers in terms of cash and income, to handle a holding period which is long term (10+years). The best thing about high interest rates, and little sentiment in the markets, is that you can really keep an eye on CHEAP purchases. It really is a buyers market, and you need to adapt your strategy for this. As long as you can handle the holding costs, I would not Rush to buy the first thing you see, look through lots and lots of properties, choose something that is really undervalued and perhaps is being sold under pressure. Once you have negotiated something with a massive discount button down the hatches and ride through the turbulance.

Good luck

 

[alexlee]

Remember that fuel usage has changed since the 70s. On a relative basis (though obviously we're using more on an absolute basis), the western world is using less fuel in that we're using fuel much more efficiently. That's why even though we're similar to 70s prices in inflation adjusted terms, we're not seeing the same effects.
Alex

 

[steveadl]

M&T, welcome to SS!

What Stu said about making sure you have enough buffer makes a lot of sense. Look at an individual property you may be interested in buying (if you've gotten that far) - and just do the sums as to what it will likley cost you to hold it.

If after you've done these calculations, you come up with a figure that you find comfortable, and believe is realistic - then go for it. Remember to put into your calculations unforseen repairs, up to 2% rise in rates (if you're not fixing), and all the incidental costs that may not immediately spring to mind ie. PM fees, council rates, water rates, insurance, dep. report etc.

As far as macro factors like oil price etc. - the choice to make an investment is something you can only decide for yourself. But bare in mind, for the last 100yrs, there have always been many reasons not to invest ie. recessions, depressions, oil price surges, massive inflation, deflation, etc.

One final thought; if you invest, you have the chance of attaining financial freedom. What would the situation look like if you don't try?

 

[Gools]

choose something that is really undervalued and perhaps is being sold under pressure. Once you have negotiated something with a massive discount button down the hatches and ride through the turbulance.

A massive discount in Adelaide? It's not Western Sydney!!

Gools

 

[PrimeCommercial]

..... Is it possible that the cycle we have seen over the past 70 years will be replaced by a different one?

I doubt it very much. I'm a firm believer in cycles (property cycles that is, not the two wheeled kind) and I'm also a firm believer that every cycle there are many people more knowledgeable than me saying 'this time is different'.

Maybe I just have to make sure I invest near the city with good access to bus routes and bike paths

Always a good strategy to employ, regardless of fuel prices.

 

[The Y-man]

Always a good strategy to employ, regardless of fuel prices.

Agree. Otherwise, a property big enough to grow your own biodiesel material.....

Cheers,

The Y-man

 

[HiredGoon]

Going into a future with more expensive energy, Australia's high energy use, low density houses which are extremely expensive, low yielding and supported by immense debt levels is just about the worst thing I can think of to invest in. Well, that and airlines.

If you think oil is going to go up, why buy a house? Buy energy shares or oil futures.

 

[stumunro]

A massive discount in Adelaide? It's not Western Sydney!!

Gools

even Adelaide isn't far enough away that it won't be affected by interest rates in the teens

 

[HiEquity]

Give us a break...

Hi guys

My first post - I came across this site over a month ago now and have been too busy mining it for my own selfish ends as a very good source of ideas and inspiration - thanks to all who post by the way - if only I knew SS existed a few years ago... Anyways, I thought I should get out of my silent corner (thanks Dazzling!) and maybe contribute a bit...

HiredGoon - I have seen a fair few of your posts on this site and normally I am all for a diversity of opinion... but in this case we have someone who is maybe just about to start an investing journey and seems to be in a great position to do so, could use a little help and all you can do is pour scorn on the whole idea... why why why??? Is trying to better your lot in life such a bad motivation??? I'm just very glad I didn't act on those type of arguments years back when I started - they haven't changed!

Seeing that you obviously think you know property is such a bad investment why bother hanging around a site that is all about investing in property??? I can understand a bit of community service in bursting a supposed housing bubble but your efforts to get us all to wake up to ourselves are soooooo out of proportion that there must be something else - I would love to know what. Anyway, even if us investors stopped buying it wouldn't make much difference to a "bubble" because we are such a small part of the market compared to all the PPOR up-traders on big salaries... perhaps you should be preaching to them instead!

With that little rant off my chest, I agree with stu and Steve - Steve's last sentence says it all for me... if you don't try you definitely won't get there! Buy as well as you can close to transport and services with a decent land content and you will still make money in your patch out of a "flat" market... and then whenever it booms again it's happy days!

 

[Mike&Wendy]

Here in Brisbane the prices have just started to stall and maybe fall a little. Everyone around here is convinced that house prices can't fall, too many people moving here. A lot of those people are from the UK and have arrived with big equity, that is about to stop, house prices dropped 2.5% last month (yes, month) clicky - just look at that chart. Maybe I can insert it,

This reminds me so much of the late 80's. I'm a pommie and was in the UK in the 80's, nobody bought a house because they knew it would be cheaper next year. The price of houses peaked in 89 and finally recovered to their previous high around 95, not bad, just 6 years. Unfortunately, inflation was around the 10-12% mark and so in reality they were still around half price.

My eldest is now 19 and I figure that in around 4-6 years is the time to help her start her property portfolio.

Mike.

 

[Pablo]

I personally wish I could buy some properties for what they were going for in the 70's what sort of % drop will be needed to achieve that?

 

[LynnH]

Pablo

Totally agree - would love to buy back (at their original prices) some of the properties we've sold over the years!!

One example: purchased in Elizabeth Downs (SA) in 1978 for $28,000 - today's price around the $200,000 mark. Will leave you work out what percentage that is - it's too early in the morning and I haven't had my caffeine hit yet!

Cheers
LynnH

 

[evand]

lynn,

Its not as huge as you think with the effects of inflation. The average wage wasn't $60k in 1978.

On a different note, i don't buy the 'buy property at anytime the best you can and have a 10 year buffer' scenario.

To me, investing in property has to be a better possibility than just hanging on by my finger tips for up to 10 years.

Thats why i only buy investment property when the conditions are as close to perfect as i can see. And now is not hat time, far from it.

Anyone that says you can't time the market isn't trying. Its the slowest moving target in existence and with the availability of info and data these days, pretty easy.

And guys, please don't label me a D&Ger. I have been through 2 property cycles and seen this before. I consider myself a realist.

Pablo

Totally agree - would love to buy back (at their original prices) some of the properties we've sold over the years!!

One example: purchased in Elizabeth Downs (SA) in 1978 for $28,000 - today's price around the $200,000 mark. Will leave you work out what percentage that is - it's too early in the morning and I haven't had my caffeine hit yet!

Cheers
LynnH

 

[MarkandTina]

Thanks for the advice given so far, it is all appreciated, even the anti-housing ones as long as you substantiate your opinions (which you have at a high level).

"If you think oil is going to go up, why buy a house? Buy energy shares or oil futures."

I'll give you my 4 main reasons up front then you can tell me if I'm crazy or not.

1. I think I have reasonable knowledge about the product I would be buying and selling, with a background in engineering and an interest in doing renovations.

2. I know nothing about the energy market and I know I will never be close enough to it to feel confident enough about knowing it (unless I have a major sea change coming which even I dont know about yet ).

Assume for example that wind farms become the major source of energy in the future. The technology is new, 95% of the players will probably not last 5 years, and I wouldnt know how to pick the 5% of the players who will survive, however I might be able to pick where housing is required to support that industry.

3. I like the level of risk involved in housing, I'm not willing to put at great risk the roof over my families head.

4. My #1 reason for doing this is to lead by example for my kids. They are in their early teens and if theres mistakes to be made I'd rather I make them than they do, and if all goes well they will have homes that they will own themselves by the time they want to do their own thing. I could stand living on a pension in 20 years time while living in my own home if I had to, but I couldnt stand the regret of not giving my kids as good a start as possible.

Anyway, I figure I have at least 100 hours of reading to do here before I start investing, I better get stuck into it

Again thanks for the advice to date guys.

 

[drelly]

I think that this thread poses an excellent question.

I also believe that cycles tend to repeat themselves but that each cycle has it's own unique factors. Two of the "different" aspects I see in this cycle are the levels of personal debt and the reason behind rising fuel costs.

Firstly, we have never before seen such high levels of personal debt. Property has never been so easily purchased. Banks have been throwing money at under-prepared and ill-equipped investors and Joe Bloggs has been able to purchase a boat on the house, holidays, jet-skis, big screen TV's... you name it... all on finance. Back in the 70's (in NZ at least), you needed to beg for money for a home of your own and if you wanted a rental property, you needed to source finance through a lawyer at higher rates. In short, we have further to fall than ever before.

Secondly, fuel prices are high for totally different reasons. Now, it's high because of demand and supply, not because of a specific situation like the 70's oil crisis. There's no debate on it... we're running out of oil. A third of the world's population has climbed out of the cave and is now sucking resources faster than they can be provided. It doesn't matter how much people whine and protest... fuel is not going down. Because of that, neither will most other things.

Inflation is likely to remain high for some time and we can only hope that the people in control of the money realise that we have limited ability to reduce it. No matter how many times lending rates are increased, they will not impact on price increases for fuel, food and other essentials.

I'm no doomsday advocate but there are some huge influences at work that our Governments can't do anything about. I assessed my position in Feb 2007 and after much agonising, I decided to hold rather than sell. I see significant pressures building on investors holding "less than desireable" properties. I have renovated 4 properties in the time since then in the hope of maximising rents and improving tenant quality. Rents are increasing but with interest rate rises, I'm doing little more than holding my own.

 

[drelly]

Pablo

Totally agree - would love to buy back (at their original prices) some of the properties we've sold over the years!!

One example: purchased in Elizabeth Downs (SA) in 1978 for $28,000 - today's price around the $200,000 mark. Will leave you work out what percentage that is - it's too early in the morning and I haven't had my caffeine hit yet!

Cheers
LynnH

Hi Lynn - it's about 6.8% annual growth.
Pablo - Assuming 4% annual inflation, current prices would have to drop by 55% (to $91k) for Lynn to purchase the house at it's original price in real terms.

 

[PrimeCommercial]

On a different note, I don't buy the 'buy property at anytime the best you can and have a 10 year buffer' scenario..... Its the slowest moving target in existence .

I'm with you on this one. All these mortgagee reposession's and fire sales were on the horizon 12-18 months ago and it's only been in the last 3-4 months that we're starting to see it all snowball.
And the peak of the property cycle from the last 5% increase to the first 5% decrease probably took 12 months. If you wanted/needed to get out you had plenty of time to jump ship or batten down the hatches for whats ahead.

...... I have been through 2 property cycles and seen this before. I consider myself a realist.

I've only been taking notice thru this last boom and can vaguely remember the early 90's (I was just coming out of highschool in '91, other more important things to take notice of). I do remember my parents situation bit hard as they had just finished a big reno and had already bought their next next project without selling the previous one in a falling market. They got caught out and they had to drop their price $100k and cost them 4 months of bridging finance.

So evand where, in your opinion, are we in the current cycle? Obviously on the way down, but how far down? 25% 50% 75% of the way to the bottom of the cycle? And how long till we get there?

 

[lizzie]

i don't know about others - and this may need it's own thread - but i am personally having difficulty working out where in the slump/recovery/boom cycle we are.

i know each cycle has it own idiocyncricies - but according to literature on past cycles the slump is caused by rising prices, lower yields, oversupply of product, rising interest rates, and a whole variety of things.

but the three key drivers for the formation of a slump are: decreasing demand for property to rent/buy (oversupply), decreasing yield, decreasing sales.

but according to data out there demand is high for rental property (lack of supply), yields are increasing, yet sales are still down.

secondary influencers are interest rates high, confidence low and inflation high - and i agree that all three and in place.

so, technically we should be somewhere near the end of the slump, beginning of the recovery - yet all professional advice (an many opinions on ss) seem to think the start of the recovery won't be for another 2 years.

the big factors are the supply and yield issues ... is there really an undersupply issue or that people just have been spolit over the last 10 years and got used to one person in a 3bed house, and that really there isn't an undersupply but emotions have to change? ... and how high to the yields have to go before the recovery starts?

 

[boomtown]

Lizzie

I think its simpler than that. Resi demand is driven by OOs and they are sufficiently cautious not to upgrade in an era of rising rates. The slump wont end until IRs start declining and then we will see a lot of pent up demand.