First timer questions



From: David .

Hello Everyone
We are new to the investing game and have decided that buying property is the way to go.
We are very familiar with the property market in our area (outer eastern Melbourne)so are considering buying the first property around here. Is this a good idea? Houses are approx $200,000 and rent is approx $200/week.
Should we look at something that will give us a positive return (a unit?) or should we expect to be 'losing' at the beginning?
Also, can anyone recommend an accountant &/or finance agent in the eastern Melbourne suburbs to help us set finances up for purchasing properties?

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Reply: 1
From: Mike .

Hi David,

There are some people on this forum who advocate buying locally because better familiarity should enable you to spot a bargain. So far you have only spotted run-of-the-mill negative geared property.

The only circumstance I would buy NG property is at the beginning of the boom, not at the end like now. All you're likely to get now in Melbourne is inflationary gains which aint much right now.

So don't buy in your area unless you can get at least 20% below market value.

Regards, Mike
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Reply: 1.1
From: Gail H

Yes, I agree with Mike - don't buy in Melbourne now. It is a seller's market. At the moment, you will pay around 15% premium, because of the shortage of stock in the market. In addition, we have just had one of the biggest booms in the history of Melbourne. We have an extremely cyclical market. The big capital games have been made for this cycle.

Boy, its heartbreaking though. The property section in the Age on Sunday reported a house in Hawthorn that sold for $329,000 (or something like that) one year ago, and on Saturday sold for more than $600,000. Insanity. It really is hard to stop yourself from dashing out and buying something in the hope of getting a slice of the action.

I also find myself wondering who are all these people who drop $600,000 on a house? Tons of houses go for this type of price. I'm a lawyer, and in my wildest dreams I could not afford to spend this on a house. Looks like I'd better put the ol' hourly rate up a bit.

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Reply: 1.1.1
From: Tibor Bode


My quick 2c. As far as I see insanity reins in both Sydney and Melbourne with the current prices and people who are paying for it, or I am basically missing something. Somehow I just can not understand where is the affordability index (based on average wages). These price growth would imply to me a wages breakout to bring back the ratio to a more affordable level, which somehow I can not see at this point in time. This also reminds me in stock market terms the same as in 2000. Stuff the P/E ratio (how long will it take until the company earns enough money for the share price you paid for it) as THIS CYCLE IS DIFFERENT! As history proved again, this cycle was not different, but lots of people lost lots of money. Somehow I got the feeling that the property market is following the sharemarket in this way. Not as bad as 87 to 89 but definitely on a very risky path in certain areas. My gut says that if interest rates rise by 2% (possible, albeit might not be probable in the very near future), there will be plenty of forced sales with this very high gearing on negatively geared property.

Just a thought.

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From: Lisa (UK)

Its absolutely fascinating that the property market in Australia so closely reflects the market here in the UK.

On UK forums we have all the usual doom and gloom posts and the will it bust posts.

My personal feeling is that the market won't break over here as it is being fueled by a shortage of housing.

When we had our big bust in the 90's (again similar to Oz) it was a different market place. Lots of negative equity, high (15%) interest rates, high unemployment and an unstable economy. These days prices are being forced up by shortages not by anything else.

Check out this link from the UK Motley Fool site showing wages vs property prices.

Despite ever increasing prices - 16.5% in the last year nationally and calculations that in 20 years the average property will be £300,000 - the prices are still in line with wages which is a big factor.

So despite people's worries and escalating prices it is still well worth buying properties as all indications are that they will just continue to rise further.

Do you have similar information in Oz, what is driving your marketplace - housing shortage, land shortage in the cities, the FHOG, the economy? Checking this out could give you a good indication as to the market direction.

To answer the original question though - bargains are still there wherever you are you just have to look harder for them unfortunately. But to quote many of my Aussie contacts - never ever negative gear!

Regards, Lisa (UK)
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From: Gail H


Negative gearing can be extremely lucrative, but timing of the purchase becomes very important.

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