'Growth' Property and the upcoming problems.

[zed_kid]

but just getting out there, and buying a house, and expecting it to perform well, and wearing $500pcm neg gearing is going to slaughter you in the upcoming few years.

Good post Aaron. I particularly agree with this bit.

Remember when RE investing used to take research, DD, and just general work? Yeah it used to be like that. Gone are the days when you could just buy a random house in any location and it went up 10%pa YOY. I think we are back to the days where actual research and work is needed to identify good RE

 

[wally]

http://www.investing101.com.au/Club/Newsletter 8 July 2010 - Aust Housingb.pdf

this is an interesting link. worth a read IMPO.

This is a great read! Very logical and well researched.

 

[Aaron Sice]

it's not my article, but it's a goodie.

the thing i like about it, is it's quite subjective.

see, if population growth actually happens, then traditionally, wages will be reasonably neutral with a positive bias. if pop growth doesn't happen, then weages will skyrocket and so will inflation so the cost of money will go up as well with the RBA's cash rate. great if you're eroding debt, not great if the debt is tied to land which no one is buying and your costs to service are exceptional.

 

[Steve Fitz]

Nice topic Aaron.

I'm also finding the dynamics of the current mining boom in WA interesting. The relocation of FIFO workers to Perth has stopped or atleast slowed dramatically, putting less pressure on housing availability and leaving a RE bubble in Perth - Our RE sales are really poor with the established market flooded with property which is driving prices downwards.

In saying the above, quite a number of developers are having serious funding issues and forecasts of new land releases are experiencing massive delays. If we do see an influx of national/international workers to Perth we're going to be in a really interesting situation where pricing pressures will be to rise but affordability is already at straining point.

I think your point of adding value is relevant however the current costs of renovation work in Perth was recently reported as 200% higher than building a new home. I don't see 200% adding much value but it's something that would need to be assessed on a case by case basis.

Nationally, if Gillard also slows down the intake to Australia we'll start to see a number of negative impacts hit the construction industry, which has played second fiddle to the mining sector for the best part of 7 years providing jobs and steady incomes for many Australians and that will have enormous consequences on the jobs front.

 

[Aaron Sice]

yes renovating is a niche market.

adding a 5th bedroom with second bathroom to an older 4x1 in a NOW posh suburb can add SERIOUS value.

adding a 4th bedroom and second bathroom to a house in a suburb with predominantly 3x1s can do the same.

adding another bedroom or two and anew living area onto a house inside a school catchment - again, great CG potential.

just gotta know your stuff.

 

[Deltaberry]

thanks for all the contributions, guys.

basically, yes - the 15% yield i mentioned is gross. everyone else talks in gross yields so it would be kinda silly for me to talk in net yields - that's a pretty high yield even for comm in net values - thanks for making me clarify.

i should point out, i see inflation coming from China, and to a lesser extent, India.

we get a lot of our product from, and a lot of our farms are now owned by, the Chinese. as their middle class grows and they expect better living standards, they will go from exporting net deflation to exporting inflation. how? through the cost of the their products rising to meet the rising demands of their up and coming middle class.

it's inevitable. it happened in every western country as the industrial revolution got to it's peak, unions got together and forced the wages up. Now China IS MOST DEFINITELY a different animal than 1800's Great Britain and United States - however, i would not want to be a government charged with controlling a 1bil strong workforce if and when they decide they want more.

and want it they will.

therefore, inflation is almost guaranteed. you can only sell the dream for so long until people EXPECT the dream, and that dream for most mainland city dwelling chinese is to 'live' like a westerner.

"find the niche" as mentioned previously is a perfect example of how to get it right. Emma71 has her LV properties, Nathan invests in CF+ properties, Rixter only picks properties with a 10 year timeframe in mind and many, many more and it all can work.

this is why i'm NOT a bear.

but just getting out there, and buying a house, and expecting it to perform well, and wearing $500pcm neg gearing is going to slaughter you in the upcoming few years.

just don't mistake activity for progress. know your goals.

Take a look at Hong Kong. The salary of a waiter there was probably $8000 per month in 1995. Today, it's probably $7500 per month. What about the Big 4 Accounting grads? $9000 per month in 2002. Today in 2010, same.

Yet during this time the city has recorded 5-6% GDP growth every now and then. China is a very different animal - to think they want to 'live' like the west is probably a bit presumptious.

 

[Piston Broke]

from 1980 till about 2002-2003 The average price of property ran in a generally gradual increase in property prices. then it spiked, and has continued along that line till now.

Thats very far from what happened in Sydney , Brisb & SE Qld.
I cant agree with that, I was there.

The reason for the extended growth and limited downfall in the last 15 yrs was:
- More wages x household
- Easy credit
- Gov subsidies
- RBA/FED IR manipulation

The only nation that can sustain that is the USA.
And there has never been such thing as "normal" market conditions.
Well not in the last 100 years anyway.

There is plenty of new housing allocated for Sydney outskirts, it just has not been profitable enough to be developed. And there's a lot of politicking involved.
So while the bigger ones hold out, small developers just cant get finance.
The bigger ones will always have "priority" over the small developments,
so just as finance eases they will stay in poll position.

 

[INVSTOR]

Thats very far from what happened in Sydney , Brisb & SE Qld.
I cant agree with that, I was there.

The reason for the extended growth and limited downfall in the last 15 yrs was:
- More wages x household
- Easy credit
- Gov subsidies
- RBA/FED IR manipulation

The only nation that can sustain that is the USA.
And there has never been such thing as "normal" market conditions.
Well not in the last 100 years anyway.

There is plenty of new housing allocated for Sydney outskirts, it just has not been profitable enough to be developed. And there's a lot of politicking involved.
So while the bigger ones hold out, small developers just cant get finance.
The bigger ones will always have "priority" over the small developments,
so just as finance eases they will stay in poll position.

The stats I was looking at are from a Steve Mcknight seminar and were from the REI. They are not straight lines, they have their peaks and troughs. I guess if you plotted the data (from REIQ?) yourself you would see what I mean. I was only interested in Bris and Perth and only looked at the stats for them.

 

[christopherl]

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Thanks hips.
Christopher

 

[investor2009]

Regardless of whatever is written here, I will bet that in roughly 10 years time, values would have risen by around 100%, remembering all reasons why it would be different this time going back through the past 50 years.

I think wages and inflation may be rampant, and or one of the only ways to buy property will be on interest ony loans for serviceability reasons and investors will have the upper hand on housing/more renters.
But this is purely speculation (like everything else is until it becomes flesh) so I believe this to be as good a word as any.
Anything said about the future is 'technically' a lie . .

But remember, it has always been hard to buy a house. Looking back to the 40's and 50's values were at around $4000 for a house. But wages were around $1000.. 'Sounds' cheap but in reality, it wasn't.

 

[wylie]

Great post investor2009. I feel the same way.

 

[Deltaberry]

When it takes 3 generations to pay off an apartment like in Tokyo, I'll start worrying. For now, I think I'm still ok.

 

[Aaron Sice]

When it takes 3 generations to pay off an apartment like in Tokyo, I'll start worrying. For now, I think I'm still ok.

yeah those intergenerational loans are scary as!

and they're supposedly 20 years into a deflationary environment!!!

 

[Ausprop]

3 generations - how long has this pattern of repayment been documented for? this would predate WWII. Let's not forget an interest only loan is an eternal loan

 

[Deltaberry]

Post WWII ... they didn't boom before then as you know.

The statistic is more about it takes that long on average to pay the apartment off (since 3 generations have yet to pass from the peak prices).

And this is obviously based on current wages, which aren't rising since it's a deflationary environment as pointed out.

 

[Ausprop]

my point is it is just an emotional tag to apply to apply to an IO loan, perhaps with some minimal P thrown in of about $1 a week - because it is simply ridiculous to forecast the combined incomes of all the families of my childrens children.

 

[Ed Barton]

3 generations - how long has this pattern of repayment been documented for? this would predate WWII. Let's not forget an interest only loan is an eternal loan

what you're kind of saying is that at the peak of Japan's silliness they only lent on three generations. but in australia, today, we're willing to lend on googolplex generations?

 

[Plumber]

But remember, it has always been hard to buy a house. Looking back to the 40's and 50's values were at around $4000 for a house. But wages were around $1000.. 'Sounds' cheap but in reality, it wasn't.

I was reading this thread to Pop - now 82. He had some things to say about ppl not knowing recent history which I thought was very interesting.

He claims that if you wanted to buy a house in the 50's or 60's and into the 70's you could get a mortgage for 4% Flat interest.

All you had to do was have the deposit. And because you had to save for the deposit, it kept the system chugging along steadily. There was no negative gearing unless you were a company or trust.

Hmm .. different world all together I suspect.

 

[Ausprop]

what you're kind of saying is that at the peak of Japan's silliness they only lent on three generations. but in australia, today, we're willing to lend on googolplex generations?

yes - at least with an intergenerational loan there is a plan to pay it back!

 

[plusnq]

I was reading this thread to Pop - now 82. He had some things to say about ppl not knowing recent history which I thought was very interesting.

He claims that if you wanted to buy a house in the 50's or 60's and into the 70's you could get a mortgage for 4% Flat interest.

All you had to do was have the deposit. And because you had to save for the deposit, it kept the system chugging along steadily. There was no negative gearing unless you were a company or trust.

Hmm .. different world all together I suspect.

Been absent for while concentrating on a new venture.....

Pop is remembering the good old days.....which weren't as easy as they are once you have paid off your loan,

http://www.loansense.com.au/historical-rates.html

1971 6% rising with troughs till 1989 at about 17%. I remember paying 18% in 1989 with Heritage Building Society (Twba). I earnt more doing fencing than as a health professional.

Its not that different, just similar to the 1970's commodity boom and late 1980's bust. Debt is higher atm so interest rates will probably be lower than before. If people pay down their debt massively then rates will rise proportionally to offset their savings and bite into their discretionary income.
Its a vicious circle.

I have enjoyed OO comments re rural and regional property. reminds me of Peter Spann and Steve McKnights forays in the 1990's. A little early in the cycle perhaps for me but it will be coming again....especially when the Governmment open the floodgates on immigration to deal with wages blowouts.

Cheers

Shane