For the seriously bored... ...Part Two!

[Stu_79]

G’day all, as mentioned last post a while back thanks for all the inspiring reads and knowledge, since then I have continued to absorb as much info as possible. From the bit of a sook I had about life throwing a couple of wobbly ones at me mid last year and making me an inadvertent land lord (http://www.somersoft.com/forums/showthread.php?t=66550) I have been powering on and now have some new questions I would love some constructive feedback on.

While I am grateful for the excellent input I received from Lizzie, Rolf, Marg, & Bradsdad, and I did try to pause and consolidate things a little, I think I must be part shark or something since if I am not on the move forward with some kind of mission it feels like I might die or something! So bub was born (And she is totally awesome!), I canned my job in Sydney at Xmas, took a new higher paying, more regular hours gig in Wollongong, and we have started moving into a spare South Coast IP the parents had which had just come up empty. Our lease in Sydney ends late Feb, my own apartment is still leased until August for $400/wk almost paying its way (I&P), and we are paying practically no rent down the coast and saving like mad. Proof all good things come to those who hustle, and there is nothing like becoming a dad to give you a turbo charged boot up the bum either! It has been a hectic couple of months, and the field of play has changed quite a bit. Our goal is still to get nice PPOR in Illawarra, keep Sydney apartment if possible, but we will cash it in if it gets us the family home.

Have been researching these following topics here and I would now like to also get people’s feedback on:

- My trawling the net/picking people’s brains give a variety of views on what will happen in Sydney market this year, I believe there is a levelling off of prices, and evidently there is a lot more sales stock available now, what do people think will be the likely extent of cooling/dropping prices in specifically in Alexandria Sydney? As an area of Sydney which I believe has a fair bit going for it, any thoughts on why it would hold up better/worse than other areas?

- If I decide I have to sell to access the equity in my apartment, is it better to wait until close to the end of current tenants lease so I can offer vacant possession, or have a tenant in place so an investor can smoothly transition the ownership with minimal loss of income? Do people see it being an owner-occupier or investor led market by mid-year? To complicate things there is some strata maintenance works which are being tendered to get sorted early this year, so until that is completed I don’t reckon the place would be sold in best condition possible, so immediate sale is not an option.

- If I currently have a PM I like, who works for one agency, but whose sales team doesn’t do much for me, is it the done thing to make him and a REA from another agency liaise together to show it etc? Do they get funny like that? I.e. PM might not make it easy for REA from another agency to arrange to show buyers through etc? I can terminate the PM agreement any time, what would people recommend? Is it best just to use the sales team from the same agency as your PM? Anyone been in this situation?

- OK, and one for the Doomers (Or optimists?)- if the bottom does fall out of the Sydney market, and my yuppie DINK box in Alexandria along with every other property in Sydney drops by 30% or something, do people see a ripple of price corrections spreading outwards? I.e eventually South Coast NSW starts to drop in line with Sydney? Should we try and sit it out this year milking the cheap rent etc and saving hard so we could take advantage of this? On the flip side, I have read recently that pockets of the Illawarra will perform well this year, so could it just be one of those market-in-a-market type things and not worth worrying about and best do our sums with prices like they are now with reasonable growth factored in? If we are hell bent on a family home in a place we love should we just suck it up and go for broke and stuff what the market is doing, since we intend to hold for many years and would have to live somewhere anyways?

- Finally, any recommendations for a good mortgage broker on NSW South Coast so I can work out my lending options?

OK I will leave it there, again, thank you for any constructive thoughts anyone may have on these points (actually, if you got this far, thank you for just reading it- what a rant!), net access is a bit patchy down here, so any replies/clarifications may be a little lagged, all input much appreciated.

Cheers,

Stu

 

[Tehanu]

I am a "doomster"

A serious 30% meltdown would only be likely if there was a meltdown in the availability of credit which would effect the entire nation so it wouldn't be a Sydney only slowdown but a nation wide slowdown. Some places however will decline more than others depending on how marginal the property was in the first place (which is not so much price as in how small a potential market it has or even more precisely the properties deemed the highest risk by the banks) and employment prospects in the region.

Property price declines happen slowly due to the illiquidity of the property market and drag out for years. So if you are waiting for bottom it might take a long time.

I don't particularly care about renting and I have no urgent need to buy so I don't care.

However if you feel strongly about renting or have an urgent need to buy you might as well buy when you feel like it. Just make it affordable and make sure it is somewhere you can see yourself living for a number of years because selling may be quite difficult.

I think in a big meltdown, for a PPOR, it is not necessarily a matter of waiting until the bottom (which can take years) but recognising that you now have the upper hand in any negotiations and buying at your leisure and for a price you feel is reasonable. The longer you wait the bigger the discount but depending on your psychology and needs you may be unhappy waiting too long so it is more a case of having the luxury to wait if you want to and are willing to rather than *having* to wait. Actually even if the meltdown isn't so big or if it is just stagnant that may still apply.

So I would say do whatever you think will makes you feel happiest and the least regrets.

Of course the problem is you are a potential seller as well...Being a doomster I would say sell Even if you have great rental yields you can also buy it back for cheaper later. If the market doesn't crash you may regret selling What you could do is, wait a bit, see how the market is going and then sell if you think there is going to have big declines (the illiquidity of the market helps you here). Just discount it a bit to get rid of it quickly (as opposed to others in your area who refuse/unable to discount) and make sure the buyer doesn't need to sell their own property first to pay you. If it goes down then you may lose some profit but that's the price you pay for leaving your options open. It may save you from regretting selling if there is no crash though.

Judging by other recent housing crashes the key difference between a cyclical correction and a "OMG this is going to last for years and cause untold misery, Keen prediction territory" is how the financial system is fairing. If banks start failing I would start bailing. If the banks look strong then it is unlikely to be like the recent housing bubble crashes in other countries.

 

[Marty McDonald]

Hi Stu,

I think the market in Alexandria / desireable areas in Sydney could go either way this year, certainly if the there is credit serious rationing by lenderds as Tehanu mentioned then prices would have to be affected (negatively) in all areas. The areas most effected if that happend would be those with the highest gearing and LVR's (generally middle / outer ring suburbs). Alexandria being mainly a young persons suburb may be quite highly geared?? I really can't see rationing happening on a large / significant scale though as surely it would have happended before during the credit markets squeeze, if its was going to happen? Another possibility is for monetary policy to be eased if the economy hits any problems with slower than expected growth or recession (floods?). The RBA has a lot of scope to stimulate the economy / property market by dropping rates ala the GFC so would probably be neutral or positive for prices if that happens. The other possible scenario is for slowly rising interest rates and flat or small price declines which I think is most likely.

If you can afford to hold the appartment with vacant possession I would think that is the better option as it gives you more buyers?

Note sure on the agent issue its a good question!

Just save and buy when you have sold would be the easiest solution IMO. I dont think the markets of Sydney and the South Coast would not be correlated in a major downturn ie woyuld bothe be affected. When you get a big movement up or down in any markets there is voltitility in prices as no one knows the true value. A stable market is the lowest risk time for selling / buying. If the market is slow sell first, if its picking up buy first if you can hold both properties.

Dont know any MB's down there but plenty on here that can do via remote.

 

[Deltaberry]

The other countries have only just started their declines in the last two years. Not sure too what extent it is an 'omg' event. Australia has had its share of crashes in the early 90s too and stalled for several years - but nothing in the vicinity of untold misery. Life went on.

D&G is too short-sighted lately, just as optimists were short-sighted a while ago. In every boom and bust, there'll always be talk about "this time is different." With a few exceptions (eg Argentina, Japan), they're usually wrong.

 

[Graemsay]

As another friendly, neighbourhood Doomster, I'd like to add a couple more points to what Tehanu said.

Take a look at this chart showing UK property prices against trend. The last property crash is apparent during the 1990s.

It illustrates two points:

1. Most property crashes in the UK have played out in a U-shape. Price falls are initially rapid, but slow down eventually. That would make the bottom easier to pick than if the changes switch from -10% to +10% per annum overnight. (Though that's what happened here in 2008...)
2. If Australia has a market crash then the chances are that prices will fall below their long term trend. Like they did in the mid nineties in the UK (see above). That is going to be very, very painful for anyone with a high loan to value ratio. Other people might find it to be a once-in-a-lifetime buying opportunity.

I'm not sure if I'm quite so sanguine about Australia's chances of continuing to avoid credit rationing as Marty is.

Foreign banks can borrow from their governments at 0.5% or 1%, lend it to Australia at a 5% or 7%, and make easy money. The AUD has appreciated against the USD and GBP by around 10% in the last 12 months, 20% if you timed the highs and lows really well. That makes their traders look like geniuses, and justifies their politically awkward bonuses...

So there's been a flow of capital into Australia, and I'm guessing that's what has supported lending there. (That was Economist's theory on one of the Credit Crash forums that shall not be named about a year ago.)

What happens if the economy slows, interest rates are slashed and the AUD plummets? The carry trade could unwind, foreign banks withdraw capital, and suddenly there's a credit shortage. That might affect house prices.

With regards to Stu's original question, it's hard to know what will happen should the market tank. Over here in the UK, the centre (London, the Southeast) is holding or even growing, whilst the periphery (everywhere else) is slowing, and the predictions are that this will continue for 2011, even though I'd argue that it's the London market that's most overpriced.

That's probably due to the massive support that the banking sector has received being channelled into higher wages, so Australia might not see the same distortions. Perhaps it'll be the mining capitals that come out best.

However, it was the real blue chip suburbs that came through the last UK crash the best, so places like Kensington and Chelsea. I don't know the Australian market so well, but I'm guessing Toorak in Melbourne and places like Point Piper and other enclaves on the Darling Harbour.

I'd be in two minds about selling up the DINK pad.

On the one hand if you sell and the market implodes then you look like a real genius. You'll be able to buy in at a better level, plus something like a two bed apartment will be a pain to shift in a down market. First home buyers will go for a larger house rather than a unit, and possibly skip the first rung on the housing ladder.

On the other, the apartment sounds like it's paying for itself, and gives you a hedge against the likes of Keen being proven spectacularly wrong. There are a number of people who sold up in 2005 or earlier in the UK because of the impending bursting of the bubble, and they're quite heavily down in their investment stakes. So it is a very, very risky strategy.

My opinion? You've got around $70,000 worth of equity in the apartment. If you sell up then a chunk of that will get eaten in professional fees, so I'd guess you'd be left with $50K to $60K.

So unless you desperately need the money (and I appreciate things sound tight in your previous post), I'd be inclined to hang onto it. But maybe thinking of paying down the mortgage faster (it's a safer way of getting a 7% return than other investments) or putting money into an offset account.

 

[MrCrumbpacker]

I am a "doomster"


Property price declines happen slowly due to the illiquidity of the property market and drag out for years. So if you are waiting for bottom it might take a long time.

Whilst this may well be possible, the only property crash I really experienced close up was that in the UK 1990.

People had been rushing into the market for fear of 'missing out' in the mid to late 80s, a final rush was instigated due to the threatened withdrawal of Government help, ..........then sentiment 'just changed'.

Suddenly there were no buyers, then desperate sellers, 120k houses dropped to 110k, then 100k etc in an effort to beat each other.

The market chased itself down, within two years in the Southeast of England prices were some 40% down.

Nobody, including myself, was yapping about 'proberdy' at dinner parties anymore, except perhaps ruefully and sympathetically.

It had been an education for most, and the ruination of many.

So, although not common, it can happen fast,... sort of sneak up,... and before you know it people are offering houses with the Porsche still in the garage as an incentive.

The resulting recession was not much fun either, and prices did not bounce back so much as gradually revert to trend by about 1997.

 

[Stu_79]

Thank you all for the feedback, top food for thought.

Some nice counterpoints on there, and I while I am hoping for the best I appreciate the Doomer input, myself I think I must be some kind of investment schizophrenic. Part of me is a typical sour grapes young person who feels like we’ve been invited to the party just in time for the cops to shut it down and have to pay for the clean up. The other half is from the same school as my old man, who grew up hard, worked hard, started small and looked long term, with a ‘Cold dead hands’ mentality about selling anything.

The plan for the moment looks to be to continue to sit tight on the fence for a little while longer, get the place fixed a up a bit and be a bit closer to the end of the current tenants lease should we want to try to sell.

Marty- good point to think about with the selling revealing true value, REA’s and the media and everyone else can bang on all day about what they think things are worth, the proof is in the pudding of what a place sells for, and there is always the possibility of turning something from a temporary paper loss into a hard one which I want to avoid if possible. Hoping that being in a popular area for young people will mean I can easily keep it rented & insulate me a little in the case of any severe economic pain, young people kept up spending and lifestyle right through the last GFC, here’s hoping we’ll stay nice and self centred in future ones!

Graemsay- some very interesting info, thank you for the effort with graphic etc, good to illustrate the market. Paying down the mortgage faster is also on the cards since probably won’t be selling it just yet, and I need to find something to put my salary packaging into from work so this may help, just have to speak to accountant first re: contaminating/overcomplicating the deductibility etc.

Crumbpacker- yep, spoke to my old man and he told me similar story about the 90’s etc over here and how at one stage had 3 mortgages on the go and rates were in the high teens, scary stuff! Right now the best sweetener I can throw in for a firesale would be a broken pushy in the visitors carpark!