Hi
M Merlin’s post posed the question of the difficulty in deciding where to purchase a PPOR in Melbourne and how to assess if asking price is excessive and if so by how much.
The value for a PPOR is personal and is a partly heart decision. If you love it enough and can afford it, then buy it and enjoy it.
If you are looking for an investment, then more of a head decision is required. Perhaps this is a crude calculation but consider this:
If the sales price of a MEL property offered is $400,000 and rents for maybe $340 per week. (reasonable Mel figures I am told) then yield is:
Annual rent divided by purchase price as a percentage of purchase price
$340 X 52 weeks = $17,680 / $400,000 % = 4.42%
Now if you believe that you would want not less than a 5.0% yield then the purchase price becomes the rent divided by the desired yield percent.
$17,680 / 5.0% = $353,600 or $400,000 - $353,600 = $46,400 overvaluation. This overvaluation of $46,400 as a percentage of $353,000 is 13.12% overvaluation.
So prices must ease, rents must increase or a combination of both is required to reach a “balance” of price and rent to represent the norm. But what is a Norm?
Of course if you are selling a property you would want a sales price above the norm and if purchasing you may want a yield of well in excess of 5% so what indeed is a norm.
Regards
Ross
M Merlin’s post posed the question of the difficulty in deciding where to purchase a PPOR in Melbourne and how to assess if asking price is excessive and if so by how much.
The value for a PPOR is personal and is a partly heart decision. If you love it enough and can afford it, then buy it and enjoy it.
If you are looking for an investment, then more of a head decision is required. Perhaps this is a crude calculation but consider this:
If the sales price of a MEL property offered is $400,000 and rents for maybe $340 per week. (reasonable Mel figures I am told) then yield is:
Annual rent divided by purchase price as a percentage of purchase price
$340 X 52 weeks = $17,680 / $400,000 % = 4.42%
Now if you believe that you would want not less than a 5.0% yield then the purchase price becomes the rent divided by the desired yield percent.
$17,680 / 5.0% = $353,600 or $400,000 - $353,600 = $46,400 overvaluation. This overvaluation of $46,400 as a percentage of $353,000 is 13.12% overvaluation.
So prices must ease, rents must increase or a combination of both is required to reach a “balance” of price and rent to represent the norm. But what is a Norm?
Of course if you are selling a property you would want a sales price above the norm and if purchasing you may want a yield of well in excess of 5% so what indeed is a norm.
Regards
Ross
