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From: Terry Avery
Hi Everyone,
I would like to address the current state of property as an investment. This is going to be a long post so you have been warned! One of the regular queries runs along the lines of "Is this the right time to buy?" My proposition is that no this is not the right time to buy.
Now the experts say the current market has 6, 12 or 18 months left to run (depending on who is talking and whether they are in the business of selling property - read real estate institutes there if you like).
I don't know how long the current boom will last but I do know that we are in a boom. Before I go through my indicators that we are currently in a boom let's look at another recent boom, the tech boom on the share market. Wind the clock back ten years and you will find that the amount of information on the share market was limited. There were some courses around, some seminars being run and investor education services being sold. Suddenly everyone became interested in buying tulips, sorry, shares. We then had TV programs on how to do it (Money) followed by magazines (Shares, Money, Personal Investment) a plethora of radio programs (we used to have a weekly program by the likes of Bruce Bond but now we have market updates, property orientated talkback as well as general investment programs). Not to mention the huge number of operations set up to teach how to trade the share market and computer programs everywhere to help you trade. Everyone was talking about investing in shares, Internet sites proliferated and with a number of floats the mums and dads were involved. I forgot the sudden increase in the quantity of how to manuals on the stock market, trends and black magic methods. Oops and then Investment Clubs as well and don't forget easy money; banks, margin lenders and LOC facilities.
Now let's look at property. First we had the seminars, The Investment Club and its imitators, then the magazines (Your Mortgage, APM), second tier marketing companies, software to assist in making the buying decision or manage your properties. Radio programs dedicated to property, TV programs (Location, location, Auction, Hot Property) Seminar companies telling you how to do it, newspaper columns on it, books everywhere on how to do it, groups clustering to support each other (this forum, Freestylers, Wraps Association). You could also add in easy money; banks, mortgage brokers, non-bank lenders and LOC facilities.
Clarification here: None of the above sources of information are bad, in fact many of them have been responsible for the building of wealth of many individuals and I commend them for their efforts.
However, the point I am making is that the madness of crowds has taken over. When everyone is doing it then that is the clearest sign that the market is overheated and will correct. When, I don't know. One indicator is when the media latches onto the downside of something. The media were writing negative articles prior to the Tech crash a year ago and for the last six months they have been creeping in warning of the dangers. Unfortunately advertising and RE agent's bodies talking up the market drown the naysayers out.
Some more indicators closer to home. Gee Cee is cashing up by selling off old property. Gee Cee has been through three boom and bust cycles and has expressed his observations. TW has been rather quiet on recent acquisitions and has been more reserved in her comments on now being a good time to buy so I assume she is also keeping her powder dry. It seems the only ones on the forum who are buying are the newbies on their first or second IP with dozens of newbies impatiently sitting on the sidelines trying to get into the game.
The problem is that I think the game is in the final quarter, the siren will blow any minute to signal the end of the game and those entering late are going to be caught out. However, I COULD BE WRONG! Each person will have to weigh up in their own mind whether things are getting out of hand. Sure there may be opportunities out there but as people keep saying, they are getting harder to find. Last weekends news stories on people lining up four deep at auctions shows on one hand a preparedness to pay well over reserve for property but then comments from forum members of no sign of reduction of the oversupply of rental properties paints a different picture. I would rather believe the forum than media stories fed from the RE industry.
In my local area the agent's are putting for lease signs outside properties. I have never seen that before. The local papers last week started putting ads for rental properties WITH a photo. I have never seen that before! It seems more drastic advertising is required to rent properties or it could be agent's have found another way to get their agency's name in the paper and on the street more prominently and get the landlord to pay for their self-advertisement. In the local agent's window last week there were five properties being sold by mortgagee in possession. I have never seen that before!!!!
Recently a comment was made, I forget the author, that any time is good to buy because if you buy now and it goes up and then falls back a bit then you will still be ahead and you have gotten into the game. Another comment is that over time it won't matter, as in the long run property will increase in value. Yes, well maybe, maybe not. Well this got me to thinking about where the cut off point would be so I did up a spreadsheet that I will try to attach and invite comment from others as to whether I have got it all wrong. In my spreadsheet I calculated how well off I would be if I bought a $200,000 IP and it went up between 5-50% and then came back 5-30% in the peak value. The spreadsheet shows all combinations of these scenarios, for example goes up 40% and falls back 15%, or any other combination you care to look at. I stopped at a rise of 50% to keep it reasonable realistic to what I expect the market to do and the drop to 30% because any higher than that you would lose money, even if the market went up 50%.
For example, buy at $200,000, increases 50% to $300,000
Market drops back 30% to $210,000
Had the market dropped back 35% then the property would be worth $195,000
OK an increase of 50% and a drop of 30% still sees you ahead. Out of the 60 combinations shown you have 60% of the scenarios ending positively in terms of equity.
However, add in the interest payment for one year at 6% and the number of positive scenarios drops to 45%, pay interest for two years and it becomes 35%.
The spreadsheet looks at paying interest up to 10% and your odds of success drop to 20% if you have to pay 10% interest for two years. That means that in 80% of the possible combinations you would lose money.
OK I can hear some of you shouting "What about negative gearing, the interest is tax deductible". Yes, well you are correct and I don't have the skills to write that complicated a spreadsheet that would allow every individual to input their tax situation into the spreadsheet and come up with an answer. Depending on your personal tax rate would depend on the outcome you receive. However, a comment often made lately on the forum is that it doesn't matter if you have to negatively gear to get into the game "Just Do It". Hmm, highly dangerous at this point in time in my opinion. Two years ago when everyone was focused on shares, yes then I would have agreed. But while everyone is focused on getting an IP, all those mums and dads and young couple struggling to make ends meet then this is not the time.
Another criticism is that property won't drop 30%. Yes, if it drops only 10 or 20 % then your chances of coming out ahead are increased. In past busts values have dropped up to 20% so if you take that as the worst case scenario then you would find that 75% of the combination of scenarios would leave a positive result. Not to forget that the experts are predicting that when the boom stops then prices will remain the same and then take off at a more sedate pace. The most pessimistic is predicting a slight reduction in values.
What makes this property boom different to past ones? Well for a start the financial climate in the past was greatly different. Those who benefited were those who had money to play with or the savvy to use OPM. There were no seminars on how to invest in property, few books around (I obtained Jan's first manual back in 1991). So the masses did not have access to the knowledge or the money to build their wealth. At the time 6% of the population owned one or more properties and most sold their only one after a couple of years so the ratio has remained consistent over the years leaving good pickings for the rest of us. I don't know what the figures are now but if they have increased then that is bad for the rest of us.
What else is different this time around? In the last bust people had negative equity in their properties. That meant their mortgages were more than the house was worth. People paid top dollar for their homes at the peak of the boom and then saw their equity dissolve overnight. They hung in there because it was their home and people will go to great lengths to keep their homes. With IPs however, it is a different ball game. Many have borrowed against their equity to buy IPs, 105%, maybe 110% mortgages for IPs. Should prices drop by as small as 5% they could be in trouble. The banks will preserve their equity at all costs so expect more foreclosures, which are already happening.
So, to conclude this rambling post, it is my opinion that too many poorly educated investors are jumping into property (through second tier marketing). There are too many starry eyed newbies trying to get into IPs without understanding the risks they are taking. There are too many people who are not reading the danger signs or if they do see them are too optimistic in their projections and gloss over the danger. This forum is a great source of support but at times I shake my head at the amount of congratulations that are handed out for getting into the game when it is clearly a poor time to do so as an investor.
I know I am taking a contrarian approach to the rest of the crowd but I can only see a world of financial pain out there for a lot of people. Take what I say for what it is worth to you and thanks to the forum for being there so we can all have our say.
Cheers to you all
Hi Everyone,
I would like to address the current state of property as an investment. This is going to be a long post so you have been warned! One of the regular queries runs along the lines of "Is this the right time to buy?" My proposition is that no this is not the right time to buy.
Now the experts say the current market has 6, 12 or 18 months left to run (depending on who is talking and whether they are in the business of selling property - read real estate institutes there if you like).
I don't know how long the current boom will last but I do know that we are in a boom. Before I go through my indicators that we are currently in a boom let's look at another recent boom, the tech boom on the share market. Wind the clock back ten years and you will find that the amount of information on the share market was limited. There were some courses around, some seminars being run and investor education services being sold. Suddenly everyone became interested in buying tulips, sorry, shares. We then had TV programs on how to do it (Money) followed by magazines (Shares, Money, Personal Investment) a plethora of radio programs (we used to have a weekly program by the likes of Bruce Bond but now we have market updates, property orientated talkback as well as general investment programs). Not to mention the huge number of operations set up to teach how to trade the share market and computer programs everywhere to help you trade. Everyone was talking about investing in shares, Internet sites proliferated and with a number of floats the mums and dads were involved. I forgot the sudden increase in the quantity of how to manuals on the stock market, trends and black magic methods. Oops and then Investment Clubs as well and don't forget easy money; banks, margin lenders and LOC facilities.
Now let's look at property. First we had the seminars, The Investment Club and its imitators, then the magazines (Your Mortgage, APM), second tier marketing companies, software to assist in making the buying decision or manage your properties. Radio programs dedicated to property, TV programs (Location, location, Auction, Hot Property) Seminar companies telling you how to do it, newspaper columns on it, books everywhere on how to do it, groups clustering to support each other (this forum, Freestylers, Wraps Association). You could also add in easy money; banks, mortgage brokers, non-bank lenders and LOC facilities.
Clarification here: None of the above sources of information are bad, in fact many of them have been responsible for the building of wealth of many individuals and I commend them for their efforts.
However, the point I am making is that the madness of crowds has taken over. When everyone is doing it then that is the clearest sign that the market is overheated and will correct. When, I don't know. One indicator is when the media latches onto the downside of something. The media were writing negative articles prior to the Tech crash a year ago and for the last six months they have been creeping in warning of the dangers. Unfortunately advertising and RE agent's bodies talking up the market drown the naysayers out.
Some more indicators closer to home. Gee Cee is cashing up by selling off old property. Gee Cee has been through three boom and bust cycles and has expressed his observations. TW has been rather quiet on recent acquisitions and has been more reserved in her comments on now being a good time to buy so I assume she is also keeping her powder dry. It seems the only ones on the forum who are buying are the newbies on their first or second IP with dozens of newbies impatiently sitting on the sidelines trying to get into the game.
The problem is that I think the game is in the final quarter, the siren will blow any minute to signal the end of the game and those entering late are going to be caught out. However, I COULD BE WRONG! Each person will have to weigh up in their own mind whether things are getting out of hand. Sure there may be opportunities out there but as people keep saying, they are getting harder to find. Last weekends news stories on people lining up four deep at auctions shows on one hand a preparedness to pay well over reserve for property but then comments from forum members of no sign of reduction of the oversupply of rental properties paints a different picture. I would rather believe the forum than media stories fed from the RE industry.
In my local area the agent's are putting for lease signs outside properties. I have never seen that before. The local papers last week started putting ads for rental properties WITH a photo. I have never seen that before! It seems more drastic advertising is required to rent properties or it could be agent's have found another way to get their agency's name in the paper and on the street more prominently and get the landlord to pay for their self-advertisement. In the local agent's window last week there were five properties being sold by mortgagee in possession. I have never seen that before!!!!
Recently a comment was made, I forget the author, that any time is good to buy because if you buy now and it goes up and then falls back a bit then you will still be ahead and you have gotten into the game. Another comment is that over time it won't matter, as in the long run property will increase in value. Yes, well maybe, maybe not. Well this got me to thinking about where the cut off point would be so I did up a spreadsheet that I will try to attach and invite comment from others as to whether I have got it all wrong. In my spreadsheet I calculated how well off I would be if I bought a $200,000 IP and it went up between 5-50% and then came back 5-30% in the peak value. The spreadsheet shows all combinations of these scenarios, for example goes up 40% and falls back 15%, or any other combination you care to look at. I stopped at a rise of 50% to keep it reasonable realistic to what I expect the market to do and the drop to 30% because any higher than that you would lose money, even if the market went up 50%.
For example, buy at $200,000, increases 50% to $300,000
Market drops back 30% to $210,000
Had the market dropped back 35% then the property would be worth $195,000
OK an increase of 50% and a drop of 30% still sees you ahead. Out of the 60 combinations shown you have 60% of the scenarios ending positively in terms of equity.
However, add in the interest payment for one year at 6% and the number of positive scenarios drops to 45%, pay interest for two years and it becomes 35%.
The spreadsheet looks at paying interest up to 10% and your odds of success drop to 20% if you have to pay 10% interest for two years. That means that in 80% of the possible combinations you would lose money.
OK I can hear some of you shouting "What about negative gearing, the interest is tax deductible". Yes, well you are correct and I don't have the skills to write that complicated a spreadsheet that would allow every individual to input their tax situation into the spreadsheet and come up with an answer. Depending on your personal tax rate would depend on the outcome you receive. However, a comment often made lately on the forum is that it doesn't matter if you have to negatively gear to get into the game "Just Do It". Hmm, highly dangerous at this point in time in my opinion. Two years ago when everyone was focused on shares, yes then I would have agreed. But while everyone is focused on getting an IP, all those mums and dads and young couple struggling to make ends meet then this is not the time.
Another criticism is that property won't drop 30%. Yes, if it drops only 10 or 20 % then your chances of coming out ahead are increased. In past busts values have dropped up to 20% so if you take that as the worst case scenario then you would find that 75% of the combination of scenarios would leave a positive result. Not to forget that the experts are predicting that when the boom stops then prices will remain the same and then take off at a more sedate pace. The most pessimistic is predicting a slight reduction in values.
What makes this property boom different to past ones? Well for a start the financial climate in the past was greatly different. Those who benefited were those who had money to play with or the savvy to use OPM. There were no seminars on how to invest in property, few books around (I obtained Jan's first manual back in 1991). So the masses did not have access to the knowledge or the money to build their wealth. At the time 6% of the population owned one or more properties and most sold their only one after a couple of years so the ratio has remained consistent over the years leaving good pickings for the rest of us. I don't know what the figures are now but if they have increased then that is bad for the rest of us.
What else is different this time around? In the last bust people had negative equity in their properties. That meant their mortgages were more than the house was worth. People paid top dollar for their homes at the peak of the boom and then saw their equity dissolve overnight. They hung in there because it was their home and people will go to great lengths to keep their homes. With IPs however, it is a different ball game. Many have borrowed against their equity to buy IPs, 105%, maybe 110% mortgages for IPs. Should prices drop by as small as 5% they could be in trouble. The banks will preserve their equity at all costs so expect more foreclosures, which are already happening.
So, to conclude this rambling post, it is my opinion that too many poorly educated investors are jumping into property (through second tier marketing). There are too many starry eyed newbies trying to get into IPs without understanding the risks they are taking. There are too many people who are not reading the danger signs or if they do see them are too optimistic in their projections and gloss over the danger. This forum is a great source of support but at times I shake my head at the amount of congratulations that are handed out for getting into the game when it is clearly a poor time to do so as an investor.
I know I am taking a contrarian approach to the rest of the crowd but I can only see a world of financial pain out there for a lot of people. Take what I say for what it is worth to you and thanks to the forum for being there so we can all have our say.
Cheers to you all
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