Getting a bit hot?

[Graemsay]

Buying a property on a 3% or 4% yield versus interest costs of (say) 7% strikes me as being a bet that prices will continue to rise ahead of wages or inflation over the long term.

Properties aren't cheap on any metric right now, and long term studies (Schiller, Herengracht Index) suggest that prices track wages, so I don't think that the odds are against such an investment.

That said, I'll probably be proven wrong by prices in Melbourne (given Satanoperca's examples) rising by 10% per year for the next decade.

 

[jingo]

It seems income doesn't matter anymore just the potential for CG's.

Cheers

This may come back to bite some purchasers when CG slows down (read stops, falls or stagnates) for a number of years ala Sydney style....

 

[LisaP]

This may come back to bite some purchasers when CG slows down (read stops, falls or stagnates) for a number of years ala Sydney style....

Hmmmm.....I have a dilemma. I have been waiting for more stock to come on to the Sydney market since the beginning of this year. While this traditionally occurs in Feb/March, we are now in March, and so far not a lot more stock. I've been hoping that if this occurrs, that this, combined with the recent interest rate rise, will have the effect of cooling the Sydney housing market to more sensible levels.

Ok, so this is where I then to proceed to ask for some pearls of wisdom from SS forumites. My dilemma is: given the current market situation - I'm talking Sydney (inner west/eastern suburbs, more specifically), do you think it would be better to a) wait until post March to see what effect stock supplies/interest rates have had on the market; b) try and buy now and fight it out with the masses (who at the moment are potentially paying 10-15% more than what the property is actually worth); or c) look for something with better yields in another part of the country (pontentially with less CG potential)?

I'm leaning towards option a) at the moment. While I believe that Sydney and Melbourne were due to experience significant capital gains after the stock market crash, and was hoping to buy in Sydney to take advantage of the capital growth over the next two years, the level of hysteria at the moment, combined with lack of stock is making me feel a little bit uneasy...

All thoughts / opinions / views very welcome!!!

 

[joeygbh]

I'd say it is getting too hot...and I'm one of those who doesn't believe the affordability index!

When land in my area that was offered to me just a year ago for $180k is now trying to sell for 270-300k then it's getting ridiculous. You could have bought a whole house and land for that price only 2 years ago in the same area. I can only think of buying homes anyway to secure a house for the grandkids when they need them.

 

[Aaron Sice]

when people living in an area think that their house "isn't worth that" when told the value - it's time to jump ship.

 

[MTR]

Hmmmm.....I have a dilemma. I have been waiting for more stock to come on to the Sydney market since the beginning of this year. While this traditionally occurs in Feb/March, we are now in March, and so far not a lot more stock. I've been hoping that if this occurrs, that this, combined with the recent interest rate rise, will have the effect of cooling the Sydney housing market to more sensible levels.

Ok, so this is where I then to proceed to ask for some pearls of wisdom from SS forumites. My dilemma is: given the current market situation - I'm talking Sydney (inner west/eastern suburbs, more specifically), do you think it would be better to a) wait until post March to see what effect stock supplies/interest rates have had on the market; b) try and buy now and fight it out with the masses (who at the moment are potentially paying 10-15% more than what the property is actually worth); or c) look for something with better yields in another part of the country (pontentially with less CG potential)?

I'm leaning towards option a) at the moment. While I believe that Sydney and Melbourne were due to experience significant capital gains after the stock market crash, and was hoping to buy in Sydney to take advantage of the capital growth over the next two years, the level of hysteria at the moment, combined with lack of stock is making me feel a little bit uneasy...

All thoughts / opinions / views very welcome!!!

I stopped buying in Melb 3 months ago, right or wrong who knows, but I have already made some great CG. The rents for me in Melb are way too low for me to continue purchasing.

Have just started purcashing in Sydney and central coast, I like the market, yields are still good but you need to look further field. With some luck in 6 months time it wont matter where you buy in Syd everyone will have a story regarding their great CG.

 

[Graemsay]

I'm bearish on property, so I'll give a more contrary view.

I keep on hearing of IPs having a yield of 3% to 3.5% in the Sydney and Melbourne markets. Assuming being cashflow neutral requires a yield of around 8% at current interest rates (please correct me if I'm wrong), then a quick calculation suggests that it'll take around a decade of 10% per annum rent rises to reach break even.

That's an extremely optimistic scenario: If rents track wages, and wages track inflation plus 0.5% to 1%, then you could probably predict rents rising on the order of 3% to 4% per annum. That would take 25 years or so to reach break even.

Going back to my previous post, a low yielding IP is a one-way bet that property prices will continue to rise in value far ahead of inflation. They can do that in the short term, but affordability, credit limits and the like will constrain them in the medium to long term.

There's also a risk that the market will go into reverse, as it's done in the US, Ireland, Spain and a number of other countries.

As for your prediction of house price rises following a stock market fall, how strong is the correlation?

In the UK the 1987 and 2008 market crashes were accompanied by house price falls. 2000 to 2001 was the exception, but that was down to the slashing of interest rates to avoid a recession.

Also, can you dig up any information on the asking prices (particularly relative to wages) and rents for those periods?

My guess is that houses were relatively cheap on the occasions that you've highlighted, whereas right now they're relatively expensive. So some of the price rises might have been down to investors moving into an undervalued asset class.

 

[topcropper]

In the UK the 1987 and 2008 market crashes were accompanied by house price falls. 2000 to 2001 was the exception, but that was down to the slashing of interest rates to avoid a recession.
.

Well, your definately wrong about the 1987 share crash. I knew that Australia had a massive house price boom starting the day after the 87 share crash, and it went for about 2 years, and in some places prices almost doubled.

So I was wondering why the UK would be different. It wasn't.

It looks to me that UK house prices went up a lot after the 87 share crash, but then topped out in 89 or 90 or so, and then dropped right back down again. These moves were similar to Australia, although our house prices remained flat or dropped very little after 1990, whereas it looks like you blokes had a very harsh fall in house prices.



In Australia the share market was incredibly overvalued in October 1987. Dividend yields were tiny, and interest rates were 15% and rising and you could get 12% in a bank term deposit, so why anyone was invested in shares getting 3% dividends I have no idea. Property at the time had very nice rental yields.

This is an interesting chart,....

You can see how property rental yields crashed starting in 87 as prices took off. You can also see how share dividend yields took off obviously after the Oct 87 share crash. If a share price halves, the dividend yield obviously doubles if the dividend stays the same.

 

[lizzie]

This may come back to bite some purchasers when CG slows down (read stops, falls or stagnates) for a number of years ala Sydney style....

i was just thinking that it reminds me of sydney 7 years ago ... is this the old 7-10 years cycle rearing it's head?

there was desparate buying, the market went silly, then the market plunged and stayed down for the the next 6 years.

 

[willair]

.
There's also a risk that the market will go into reverse, as it's done in the US, Ireland, Spain and a number of other countries.

As for your prediction of house price rises following a stock market fall, how strong is the correlation?



Also, can you dig up any information on the asking prices (particularly relative to wages) and rents for those periods?

My guess is that houses were relatively cheap on the occasions that you've highlighted, whereas right now they're relatively expensive. So some of the price rises might have been down to investors moving into an undervalued asset class.

The only question to ask yourself is and i know that a few in this site have seen several downturns from their posts,myself i have been through 2 recessions- high interest rates-nil CG over several years, but i have never seen property become virtually worthless,but the market these days is in your face 24 hours a day,from the media spinners,R-E high flyers who claim the market is going up 10% per month,maybe so
it's happened before,like any investment cycle,and with the understanding i have these days this cycle is no different only the numbers,but i know one simple fact "HISTORICALLY" the longer you hold onto any property investment,the more it's worth,come what may..
..willair..

 

[stumunro]

Sydney is Australia's business and financial capital. As long as the NSW economy is relatively flat, and access to credit is tight, the property market won't go in leaps and bounds.

There is massive demand for property and that isn't going anywhere.

As an investor I see a window of opportunity for middle to high markets.

As credit loosens I think we will see a significant price jump across the board (perhaps even as much as 40-60%% over the space of a few years)

 

[aussierogue]

The fact that Sydney is flat is great for Melbourne. The reserve bank is cautious because the rest of OZ iz not booming - So it only puts more pressure on the Melbourne boom. Im sure they wish they could raise interest rates in Melbourne only!

 

[aussierogue]

Only gets better for property / Worse for those not in

http://www.theage.com.au/business/rba-warns-home-prices-could-go-higher-20100310-pwlj.html

 

[lizzie]

i have never seen property become virtually worthless,

not overall, but it does happen in patches - dead mining towns, dead fishing towns, dead abbatoir towns ... usually these are small places, in the middle of nowhere with no other industry nearby, and no other reason to exist. even some big town - tamworth 20 years ago you couldn't give away. now it's sought after.

but yes - not generally.

 

[willair]

not overall, but it does happen in patches - dead mining towns, dead fishing towns, dead abbatoir towns ... usually these are small places, in the middle of nowhere with no other industry nearby, and no other reason to exist. even some big town - tamworth 20 years ago you couldn't give away. now it's sought after.

but yes - not generally.

I agree there would be places like that in Qld-Nth Nsw,that have been like that over the years,but it would be hard to find something in the Qld
like that now,all have had good CG over the past 8 years,and assuming the valuation stacks up,they never stay that down for long, not everyone wants to live in the city, we bought a Hotel in nth Qld 15 years ago in a dead end beach front sugar town,was the fastest way i ever lost 180 k over six months in my life..willair..

 

[LisaP]

Thanks for all your replies regarding my dilemma. If anyone is interested, I have decided to continue looking for an investment property in Sydney (negatively geared), take advantage of the capital gains made over the remainder of the cycle, and as soon as possible lock in these gains and buy a second, cheaper property that delivers positive cash flow. I'm hampered somewhat with location at the moment because I am a first home owner and am required to live in the property for six months.

As a general observation, I've noticed more stock starting to trickle into the Sydney market, which will hopefully take some heat out of the market and allow investors to get in at a less inflated price.

Also, Residex (from memory), suggests that the real boom will begin from Spring this year, and believes that the best performing properties will be those that meet the affordability criteria, i.e. those under $600,000.