Investor's dilemma... is the property market 20% overvalued at the moment?

[mmerlin]

The SBS Business Show on Friday had an interesting piece on the overheating of the property market.

You can read the transcript at:
http://www.sbs.com.au/business/index.php3?tid=661

Panelists were:
Mark Rider - UBS Warburg.
Michael Davoren - LJ Hooker
Neil Jenman - Jenman Group

Basically they are saying that in general, property is overvalued but will probably keep rising in price for a while yet

Mark Rider estimated that back in September 2002 the market looked to be about 20% overvalued. If this is true then where are we at now?

They didn't give any real indication as to when or how much prices will drop if there is a correction...

Anyone want to hazard a guess as to when and how much prices might fall in a correction? Or more specifically, any guesses as to approximately when, and how much the possible percentage drop in the different capital cities might be?

My personal situation is that I am looking around for a PPOR in Melbourne and seeing articles like this is a bit worrying since I don't want to be buying at the peak of the market...

I suppose though, that a great property bought at any time in the economic cycle over the long term will turn out to be a good investment if held long enough...

Besides the following possible indicators:
- rising unemployment
- rising interest rates
- share market sparks back up and money moves back to shares.

are there any other key indicators to watch before a correction could take place?

The Hudson Institute use a visualisation device they call the "economic clock" which kind of approximates which of the three investment classes are currently the best place to put your investment dollars.

The cycle goes
Stock Market -> Real Estate -> Fixed Interest
and around again.

In November 1999 they were saying Shares were done (being the current highest-performing investment class), and that the time for Real Estate investing was beginning. See page 2 of following Acrobat document to see the Economic Clock.
link: 1999-11-01

In November 2001 they were saying that the Real Estate cycle was nearly over as the best performing investment class (they were a bit early on this one), and that Fixed Interest would soon be the safest investment class.

If their representation of the economic cycle is correct, then it would seem statistically best to put money in fixed interest investments until the Stock Market starts another bull run, then stay in the stock market for a few years and then once again start investing in real estate.

These reports are making me hestitate about buying a PPOR in Melbourne... but I would really love to own somewhere down here now (I suppose that's the non-investor emotional side of me talking

If the Business Show people are right then I could be better off waiting a few years for some fallout to occur and then jump in at a mortgagee sale or similar fire sale...

In the meantime I could continue renting and investing the difference in fixed interest and then later on the stock market.

As with any kind of prognosticative speculation by the pundits, they might be wrong, and if they are then I will once again be kicking myself in a few years for not investing in property ("a few years earlier") but if they are correct, and a property I buy this year falls in value and then takes 5 years to reach the price I bought it for then I would not be pleased with myself.

I suppose this is the investor's dilemma... should I or shouldn't I... the mind flip-flops while the clock tick-tocks...

 

[Jakk]

Originally posted by mmerlin



They didn't give any real indication as to when or how much prices will drop if there is a correction...

That's because just like the rest of us, THEY AINT GOT A CLUE!

regards

 

[Aceyducey]

mmerlin,

While I can still find positively geared properties (at reasonable working class rentals) all over the country I'm not concerned that the property market is too high

I think Australia is big enough to have a number of different markets & it would take a real catastrope for the market to go experience a national 'correction' (which I define as more listed properties static or declining in price than increasing).

On a market by market basis, I think we would need a large move in unemployment, inflation or interest rates to stop the property market increasing - in the order of 2% change in a six month period.

The only other indicators of a market correction I can think of would be:

A change in government policy which makes it more favourable to not buy IPs (could be state-based)
Mortgage repayments increasing to more than 35% of average wages in an area
Major shift in population demographics/density in an area

Cheers,

Aceyducey

 

[always_learning]

This is my philosophy at the moment
"Buy what you can if it makes sense for you, dont try to guess the market".


This is based on a few observations:

• Many companies that grow by aquisitions (buying other companies). The most successful of these dont try to guess the best time or worst time to buy. They just buy without regard to guessing the market. The question they ask is "is this company right for us now at the price we have to pay today?"
• Jan Somers suggests in "More Wealth from Residential Property" that we should buy when we can afford it without regard market conditions, but I believe this is under the assumption that you are buying median priced housing stock or below.
• If the market is falling many people will be saying "don't buy now the price will get cheaper".
• If the price is static people are saying "don't buy now the price is going nowhere"
• If the price is rising people are saying "don't buy now the price has boomed and the bust will be soon"
  [/list=a]
  
  The time to buy is now when what you are buying you believe meets your requirements.

 

[bundy1964]

Originally posted by always_learning
Many companies that grow by aquisitions (buying other companies). The most successful of these dont try to guess the best time or worst time to buy. They just buy without regard to guessing the market. The question they ask is "is this company right for us now at the price we have to pay today?"

Hi AL

What about some of the efforts of AMP, Telstra, Tower and the similar others who have done write downs on the book values of what they have taken over?

sceptics-r-us

bundy

 

[always_learning]

Originally posted by bundy1964
Hi AL

What about some of the efforts of AMP, Telstra, Tower and the similar others who have done write downs on the book values of what they have taken over?

sceptics-r-us

bundy

AMP, Telstra, Tower are they companies with a strong history of growth by aquistion? I dont think so, I think they just decided they want to play the game? I am thinking of companies such as GE.

 

[geoffw]

I was talking to my local RE agent yesterday. He was saying that, in the Canberra market, every market drop has been preceeded by some eveny- a change of government, mass layoffs in the government, or a big rise in interest rates. Some places dropped value 33% or more.

However, in all of these cases, it took 3+ months for the market to drop- and those who were aware of it got out early.

 

[WillG]

change of government & mass layoffs in the government are closely related. Little Johnny is holding all the cards at the moment - Can't see a change in government unless Mr Costello takes over the reigns

Interest rate rise ???. The 5 year fixed rates wouldn't indicate it.

I reckon a booming Stock Market is about the only 'event' likely to cause a major change in property market.

I think prices will continue to rise, yields will drop further and housing will become less affordable - Property will stall - When ??

 

[hobgoblin]

On that note, WillG, what DOES happen to the property market when the stock market peaks? (needless to say I am pretty uneducated and uninterested in the stock market...)

I have just read Rich Dad's Prophecy and heard Robert Kiyosaki state on stage last Saturday that "Now is NOT the time to buy property" I believe there is a fair bit of wisdom in Rich dad's predictions, but the million dollar question is WHEN???

I have just bought an inner Sydney unit for $2850 LESS than the vendor paid for it 7 years ago, but that is just one example.

My kingdom for a crystal ball....!!!

Hobbo

 

[bundy1964]

what DOES happen to the property market when the stock market peaks?

If the stockmarket goes as well as property has been and property returns are low then there will be some value shift from property to shares. Interest rates would play a huge part in this too as would vacancy rates.

I have just bought an inner Sydney unit for $2850 LESS than the vendor paid for it 7 years ago, but that is just one example.

That would sugest the previous vendor paid too much for the unit in the first place.

bundy

 

[see_change]

I'm with Geoff on this one

Over the short period of time I've become actively involved in investing ( shares and property ) , all the signs are there to see if you know what to look for and are keeping an eye on the market.

It's only once you've seen something happen when you thought it would happen , a couple of time , that you start to have faith in your own ability to predict and understand what is going to happen.

The majority of people ( investors included ) do not look at their particular market with any degree of insight and only react when it's bleeding obvious to blind freddy that somethig is happening.

I'd guess that the 90 / 10 rule holds true for the number of investors who have much idea of what is really happening , and why it is happening as compared to those who have no idea.
ie 10% of investors know what they're doing.

( still working out which group I'm in......)

see change

 

[JSH]

NOBODY CAN PICK HIGHS/LOWS IN A MARKET CYCLE

Firstly, it must be said, that nobody can pick the high or low point in any market cycle. This is determined by a large number of economic factors that nobody can foresee.

The answer to your question is quite simple:

If your property investment views are longer term, and you do the research and buy at "fair market value" for the area you are looking at, then your property will always increase in value over a period of time.

Good luck.

 

[Bear924]

When I purchased my PPOR I examined the amount of money I would need to pay to rent any property that I purchased. If you can rent a property for significantly less then you can own the property I would suggest now is not the time to purchase that property. I would limit my minimum rental yield to 5%, lower then that and I wouldn't buy.

 

[JumJones]

Yeah, this follows Steve Navras method of calculating what the max price you should be payin for a particular property is ..

Checkout his website for details, but the gist of it is basing the price on what you can rent that particular property out for and multiplying that into the three/five/whatever year average yield for the suburb the property is in.

I think its a fairly general equation - tying down the yeild % and rental return requires a bit of give and take so the purchase price is gunna be +- x%

 

[rambada]

Of course its overheating - the sheep are our there buying anything not bolted down. Especially units.
HOWEVER - I'm still shopping (and buying - houses). In any market there is a wholesale property available every day - its realising what is wholesale and what is retail. Education is the key, know your area.
Example - Working on our IP, an area we know and love (for the CG of course) a RE agent pulls up and has a chin wag. 10 mins later we are negotiating to buy a place down the road at wholesale. If the market collapses tommorow we are still ok, rent and reno will make the place neutral to positive cash flow. Knowledge is the key and RK is right - for the average investor, don't be average. Go forth and prosper!

 

[steven]

Originally posted by hobgoblin
On that note, WillG, what DOES happen to the property market when the stock market peaks? (needless to say I am pretty uneducated and uninterested in the stock market...)

Hobbo

Hobbo,
from my understanding of the investment cycle, when the share market peaks, investors look towards the realestate market,
and after a major share market collapse, investors then look towards investing in a rising share market,

regards steven.

 

[Mikhaila]

Steve, your understanding is incorrect. Majority of investors run away from shares after major share market collapse to whatever they can find. Usually it is realestate. When the share market peaks investors (major part) are still continue to invest into shares.

 

[bundy1964]

Hi

Are we talking true investors or sheep here?

My mother still thinks money in the bank is the best investment in the world

bundy

 

[steven]

Originally posted by Mikhaila
Steve, your understanding is incorrect. Majority of investors run away from shares after major share market collapse to whatever they can find. Usually it is realestate. When the share market peaks investors (major part) are still continue to invest into shares.

Mikhalia
I will Quote to you some info from Stuart Moore, Author of How To Start with no savings and get rich safely,
(how to understand and profit from economic cycles)
"WHEN TO BUY SHARES",
"This is usually Three To Four Years after the previous peak of the share market"
Not at the peak as you sugest,
Keep in mind the property boom on avarage is a two year period, that occour each 7 to 9 years,

"WHEN TO SELL SHARES"
"When the Index has climbed to three times the previous low or when share prices rise above the underlying values that justify the price,"
"The rapid rise during the final few months of the share market Bull Run (RISE) can prove a powerful lure to hang in there, Remember the adage: you cannot go broke taking a profit"

Regards Steven.

 

[Mikhaila]

Hi Steven,

I’ll try to be short as I don’t want to start a discussion about when to buy or sell shares. I just want to make couple of comments.

1. I didn’t make any suggestion when to buy/sell shares, but just expressed my view how it actually works in reality.
2. Theoretic knowledge is great. It does not work too well in real life way too often.
3. What you say in your original post is not quite the same what you are saying in your second (may be I misunderstood the first posting)
4. If one can reliably predict when a given investment market peaked/bottomed, this is like having a crystal ball. There are countless methods of doing the predictions, many of them complex mathematical models. So, giving and believing in advices like you quoted above “When to sell/buy shares” is naïve at least.

Last thing, there is well known saying in share market “buy higher highs and sell lower lows”. If this phrase taken out of context or blindly applied by novice investors it may be dangerous, but generally speaking it is true and wise suggestion. Unfortunately, majority does just the opposite and loose money.

Cheers