Is 'now' the time to buy?

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From: KJL .



Here's a point for discussion to entertain your mind on a Monday afternoon, which might be relevant to some people looking to invest in the short term.

Many IP guru's always say "the time to buy is now", and that over time any mistakes will be corrected, which I accept as a principle.

That said, we've all seen posts commenting how overheated and unsustainable the Sydney and Melbourne markets are, and I was in Queensland this weekend, and local markets there are also said to be 'on fire'. I acknowledge much of this information is anecdotal, but there does seem to be consensus on the unsustainability of some of the prices being paid.

Some on this forum can always find bargains, and I realise that I'm opening myself up to having criticisms of being 'lazy' levelled at me, but let's take a sample buyer (not me!) who is buying today in, say, Melbourne at several thousand under market value - not an enormous amount, but enough so that the buyer is happy they've got a bargain. To make things easy, lets say the property is cashflow neutral.

Should that buyer purchase at the top of a market (and let's assume we're approaching that now) and wait several years for any 'mistakes' to be corrected, or should they wait for a correction and for houses to actually fall in value (which I gather from posts on this forum happens in every cycle).

In short, in your experience, is there ever really a time when the markets are so overheated that "now" is just not the right time to buy and a wise buyer would be better of waiting?

KJL

 

[always_learning]

Reply: 1
From: Always Learning


Not that I would ever consider myself as a guru, but anyway let me bore you with my opinion.

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It is a very natural human reaction to think that its too expensive now when 2, 3, 5 years ago a place like that worth only 1/2 of it. This is a typical way for people rationalize not buying something not doing anything. I still remember one of my older relatives basically saying what a fool I was to buy a house in Yarraville/Seddon in Melbourne's inner west at 88K (it wasn't worth 60K!), actually I spend the entire night worrying if I had made a sound purchase! Several years latter aforementioned relative still has yet to make any investments that I know of, now he says the banks are the problem!

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NOW is an excellent time to make money.

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NEVER is a good time to loose money.

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Interestingly for me, in Jans most recent book I she has omitted warnings against "Not to buy at the top of a boom". I think her reasoning is statistic given (from memory, correctly me if I am wrong) that median or lower priced houses have never suffered a decline in price. Personally I doubt this statistic, based on my limited experience in the early '90 Melbourne property boom, prices of lower than median housing stock (inner west, that I was interested in) lost at least 20%. Even at the time of purchase the property I purchase had a capital improved value on the council rates notice of $109K (with vendor telling me after purchase that they had an offer of 120K at the peak of the boom), I had purchased at $88K!

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If a basic property is cash flow +ve ( currently very difficult in Mel, Syd) or if a redevelopment/renovation IP project results in a cash flow positive investment (appears to be possible in Mel, Syd), then indeed NOW is a good time to invest.

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If you are buying a cash flow -ve property then you are hoping that in several years that the capital gains or rental increases will return the losses many times over. This strategy has the added bonus of having any losses for the year deducted from your taxable income.

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So IMO you would only buy a negative geared property if:

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<li> You expect long term capital gains, ie the price to increase over time.

<li> You expect rental increases in the future to result in a +ve cash flow.

<li> If you delayed the purchase of the property you would expect to pay significantly more to purchase the property latter. Remember a dollar today is worth more than a dollar tomorrow.

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Thus if you are buying a -ve geared property, and you believe that we are in a boom and that prices in the future will be the same or less, then now is not the time to buy.

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As for a neutral geared investment, if it was a new or near new IP with healthy deprecation schedules and you paid less than current market price, and you believed you would be rewarded in the future with good capital gains, then in general I think this would be a good investment.

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However just a warning, if you guess that prices will fall significantly in the future, then the last thing you want is -ve equity (price of the property is less than current debt) plus -ve cash flow. If you feel trapped in the rat race now, just imagine how job dependant you will be in such circumstances. Many will say this is impossible, cannot happen in Australia to smart investors, but historically this happens all the time in other countries and even in some Australian markets (Gold Coast).
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In Japan in the peak of the boom, smart investors, indeed said "Yes, it's a boom, we know that prices could fall a little, but in the long run, prices will continue to increase, so buy now, or they may even get even more expensive!", of course 10 years latter prices are still falling and so may people are trapped in -ve equity situations. Also in Japan at the time the herd believed that cash flow didn't matter, capital gains matter! If you had capital gains then everything was OK!
Nobody guessed that the prices would fall, so much for so long! Now in Japan cash flow looks good on IP, 7~11%PA on a 2%PA finance. IMO cash flow sets a bottom line value on the property.

 

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Reply: 1.1
From: Paula Dee


There is a good graph of Median House prices and interest rates since 1960 in Sydney in the Sun Herald May 12 if you can get a hold of it.

Paula