Is it the wrong time to invest?

Hi. Is it unwise to be looking at my first investment property purchase in the next six months with the negative 'bust' predictions? As I understand it, if I intend to hang on to the first property for the long term it shouldn't matter if prices fall in the next few years because over the long term, property will always rise. I just need to be able to cope if mortgage payments go up due to interest rate rises. Please correct me if I am completely wrong.

In the current climate is it better to a have a higher rental yield rather than relying on high capital gain? THe rental is less likely to vary in poor times than the prices of property so wouldn't there be less risk than banking on the value of my property increasing?

This forum is making me want to get into the market asap when I know that it is likely to be the wrong time.
 
mustapha,

Great question. Unfortunately there are no right or wrong answers.

I invest for capital gain, yield or a potential development opportunity sometime down the track. Generally yield & capital gains are inversely proportional.

If you invest for the long term it doesn't make a lot of difference when you invest but if you invest at the wrong time you may have many years of minimal growth; If a good deal becomes available you may not have the funds ready to snap it up.

I am uncertain about the growth of IP's in the areas I am interested in and are holding back until I can see some potential. I believe the current market is too competitive for buyers and generally doesn't represent value for money.

Not all areas are the same. The areas you are interested in may have properties that represent value for money.

Hope this helps
 
Any time is a good time but make sure you do your homework.

IP investing is MAGIC you can make money out of thin air.

Be bold.

Cheers Brenda:D
 
Originally posted by mustapha
Hi. Is it unwise to be looking at my first investment property purchase in the next six months with the negative 'bust' predictions?

mustapha,

Predictions are exactly that - predictions.

What is the agenda of the people making the predictions? What do they gain from the predictions being right? How did they model their information? How accurate is the information they used to make the prediction? Do they have expertise in the property market and in which areas? How accurate have their predictions been before?

You have to do your own research and form your own opinions.

one of the major reasons many people get into property investment is so that they have control over their investments and can call the shots.

Don't let the analysts OR others on this forum tell you how and when to invest - do your own due diligence, call your own shots.

That said, the property market is not homogenous, you can make money anytime - somewhere.

This is the same as the stock market. - it's simply a matter of doing your research and selecting the right investments to make.

Cheers,

Aceyducey
 
If you are worried about the state of the market try to find a property below value in your area and renovate it. You wont have to wait for natural growth in equity, you will be creating your own.

If youre concerned about a crash, then sell after the reno or rent for 12 months and pay less CG tax or hang onto it, use the increased equity and keep your eye on the market for signs of a downturn if you want to get out.

There is a solution for every state of the market.
 
Originally posted by WillG
mustapha,

Not all areas are the same. The areas you are interested in may have properties that represent value for money.

Hope this helps

Hi Will,

I have heard a lot of people use the term "value for money" what does this mean? Doesn't the market set the value??

Gordon
 
Hi all,

I've recently finished reading the Warren Buffet way (can't remember the author sorry) which is basically a book about trading on the share market from a fundamental perspective.... eg you don't try to pick this years hot stock, instead you look at the company and determine what the true value of the company is. If the stock price is over your determined purchase price then you don't buy that stock, if it is under you do.

The book went on to say that Warren Buffet views the sharemarket as a individual trader (who he calls Mr Market) who buys and sells depending on how he feels during that day. Therefore one day Mr Market may feel lucky and value stock for a high price, on other days he may feel unlucky and value stock at a low price. Trying to decide what Mr Market may do from one day to the next can be very difficult and therefore creates an element of risk. As an investor you need to realise that Mr Market really doesn't know what he is talking about and therefore you must determine the real price of each share and wait until Mr Market determines that is the value of that particular share.

I feel that property investment is similar to purchasing shares in that there is a Mr Market which may or may not be optimistic or pesimistic at any one time.... it is up to the investor to determine whether the value Mr Market believes a property is worth is the same (or close to) the value you believe a property is worth.

My view of determining the purchase price of a property is that is should produce a return of 10% per year... 5% in rental yield and 5% in captial gains. At the moment the rental yield is generally low in areas where there is a historical 5% captial gain... some may argue that the 20% capital gain available in many areas in Australia offsets the low rental yields however I would suggest that perhaps Mr Market could be just a tad too optimistic.
 
Hi Gordon,

>I have heard a lot of people use the term "value for money" >what does this mean? Doesn't the market set the value??

Value for money may mean a number of things. Double brick houses look much the same as single brick houses but have better insulating properties and a higher replacement value.

A property situated on a block that allows further extensions is more valuable than a property that 'waste's' the land on a block.

A better aspected house will have good thermal efficiency.

Brick garages are worth more than colorbond garages.

Appearances & first impressions generally dictate the price of a property but don't always reflect the true value of a property.

A property may represent good value for money if it requires cosmetic changes (painting & garden weeding) or changing of internal 'non load bearing' walls to increase its market value.

I generally find older properties have a chance of being 'good value' compared with new properties.

Another technique I use to determine 'value for money' is the replacement cost of a property. Property = Land + House + Garage + Gardens. Replacement values for House and garage can be calculated fairly easily. Land has a ucv and a market value - market value is perhaps a little trickier to estimate but not impossible. If the replacement cost is more than the sale price you generally have good value for money.
 
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If you want to take a more active role in your wealth creation strategy then it might be wise to consider the opportunity cost of holding a property during negative growth periods...

investorweb will have a defn of opportunity costs if needed

essentially it means the cost of the best opportunity forgone

its a very large costs that can be easily glossed over

Not to leave it on a negative note.... who cares what the predictions say, my strategy is sometimes educate yourself and make your own :)

Originally posted by mustapha
As I understand it, if I intend to hang on to the first property for the long term it shouldn't matter if prices fall in the next few years because over the long term, property will always rise. I just need to be able to cope if mortgage payments go up due to interest rate rises. Please correct me if I am completely wrong.
 
Hi mustapha,

I may be bucking popular opinion here but I disagree that there is a wrong time to enter the market. Popular opinion says the wrong time to enter the market is when the market has peaked and is about to slide down. But what if you have determined that the market is 20% overpriced and you managed to negotiate that off the purchase price?

So, in my opinion, what matters is the price you pay relative to the market. When the market is obviously growing and there is a lot of competition for the best properties you may not mind paying asking price to get it quickly. On the otherhand, when there is an oversupply or less buyers in the market, it may still be a good time to buy at the right price. It's up to you to convince the vendor that they have overpriced their property and you will buy at a more realistic price.

Regards, Mike
 
Originally posted by Mike
Hi mustapha,

I may be bucking popular opinion here but I disagree that there is a wrong time to enter the market. Popular opinion says the wrong time to enter the market is when the market has peaked and is about to slide down. But what if you have determined that the market is 20% overpriced and you managed to negotiate that off the purchase price?

So, in my opinion, what matters is the price you pay relative to the market.

I'm with Mike here, there are good deals in every market, you just have to search harder at some times in the cycle.

And being contrarian (going against popular opinion) is a good strategy anyway....except when everyone is doing it :)

Cheers,

Aceyducey
 
The trend in East Midlands house prices

The graph below shows that since 1995 average house prices in the East Midlands have more than doubled from £52,366 to £106,366. This is an increase of 103%, providing very substantial capital gain to those households who have purchased homes in the region.

In common with most housing commentators we are concerned about the growth of house prices over time, and in particular, the rate of increase over the past year or so.

The graph above shows price changes and demonstrates how prices fluctuate on a seasonal basis. This is to be expected and reflects the changing balance between supply and demand over the year. We are also concerned however to understand the bigger picture and the longer term trend in prices. This shows, via the "straight line" trend that prices have begun to increase rather more dramatically since the beginning of 2002.

The "straight line" trend, which, in essence, minimises variation about a "line of best fit", shows that prices are currently significantly above the longer term (1995-2002) trend; we estimate around 16% (the difference between £106,000 actual prices and the £92,000 the straight line trend suggests).

The conclusion we draw is if that prices are to "correct" around the longer term trend line, then they will either need to fall back sharply in the short term, or remain static for a period until they "re-converge" with the longer term trend.

These conclusions of course, assume that the trend years 1995-2002 are indicative of the even longer run price trends. There are many housing market peculiarities and step changes in the longer term trend should not be entirely discounted.

[Source: http://construction.ntu.ac.uk/housingeastmidlands/hem_prices_nov02.htm ]

/forums/photopost/data/506/3house_price_trend.gif
 
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Rule of 72

Divide the interest rate into 72 to get how many years to double your money.

We can apply it to the Sydney property market where long-term average house-price growth has been 9-10%. Therefore, it takes between 7 and 8 years for prices to double in Sydney. I should add that 9-10% is based on past data in which inflation averaged approx 5%. Since then monetary policy has changed to keep inflation in check under 4% so long-term price growth will probably be less than 9% in the future. If that happens, house prices will take longer to double.

Residex have reports which can forecast growth to 8 years for a given house price in a given suburb. If the forecast for the next 8 years is below 9% (based on 5% average inflation) then it would indicate that the purchase price today is too high to double in the normal time. You would need to purchase at a lower price to meet normal growth expectations.

Further reading:

www.residex.com.au/downloads/api/double.pdf
www.residex.com.au/downloads/api/nineties.pdf

For economic updates:

http://www.qtc.qld.gov.au/internet/pub.nsf/content/Economic_Updates

Example:

http://www.qtc.qld.gov.au/internet/...2.PDF/$File/Economic_Updates_Monthly_0702.PDF
 
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