melbourne inner east bubble trouble calcs

Hi,

I went to auction an in melbournes inner east... suburb called glen iris.

http://www.realestate.com.au/property-apartment-vic-glen+iris-106571232

Property sold for $522k. very nice street, bigger than normal 2 bedroom unit.


For an investor looking at an L.V.R ratio of 80% I have calculated the below

Purchase Price $522,000
Stamp Duty/purchasing costs $28,000
Loan amount 80% $417600
Cash Deposit Required - $132,400

Interest only loan at 7 % $29,172 per year or $561 per week.

Expenses

Body Corp $2000
Water $600
Rates $600

Total holding cost per annum $32,372

Rental Return Estimate - $19,760 p.a
Property Agent Fees - 6% $1000 p.a

Total Expenses - $33,373
Total Income -$18,760
Deficit Per Annum - $13612 ($261 per week holding Costs)

Other Expenses ( interest lost on deposit for property/ stamp duty)
$132,400 @ 6% p.a = $7,944

I undestand there are tax implications for every individual investor.

But the way I see it the property would need to increase by $21,566 in the first year to just break even.

And If the owner wanted to sell the property to crystalise a profit there would be fees of 2.2% in realestate agent fees, not to mean any capital gains that the owner is liable to pay.

I know property is a long term investment, but one would have to argue that the holding costs of this property are very high and the risk reward doesnt appear to be in the buyers favour over the short to medium term.

Maybe I am missing something here.... maybe this particular property may suit a high income earner who is after some tax breaks and is happy to run an investment at a significant loss cashflow wise.

If interest rates hit 8.5-9%... the numbers look even worse and an investor would be looking at significant cashflow problems, which could hinder future investment, due to lack of power on the borrowing power front.

My analysis doesnt cover everything.. its kind of a simplistic way of looking at things.. and really i just beleive the only reason to purchase this property would be if you beleived the property was going to go up in value signficantly.... in my opinion pure speculation given the lack of rental return. 2.8 % returns seem pretty ordinary... Past performance in glen iris has bee great, but if this was a company trading on the stock market it would be trading on very very very high P.E ratios.


any thoughts would love to hear regarding this purchase at 522k...
 
Keneth

Your right at this moment in time it does look pretty steep, when I bought a villa unit just round the corner for 180k 9 years ago I thought at the time exactly the same, its now worth well more than the property you list and it makes $1k+ month positive geared each month. We don't know if it is a investor or a PPOR. Time will tell whether it is a good or bad purchase. For him to get the growth you mention he needs 4%, I do not see that as too extreme for the location

Jezza
 
I went to auction an in melbournes inner east... suburb called glen iris.
Great place Glen Iris, my old neighborhood...
Property sold for $522k. very nice street, bigger than normal 2 bedroom unit.
Very nice street? No kidding.
This area of Glen Iris bordering parts of Malvern and the Central Park area is very, very nice.
You only need to have a look at the prices of the houses around there (1.5mil +) to see that 500k for a big 2 bedroom unit is not too bad.

I don't disagree with your figures, and from an investment point of view doesn't make that much sense to buy at the moment but I agree with Jezza that it might well be a PPOR. In which case it's about as cheap as you can get into GI.

Even if there is a "bubble" in the inner east at the moment, any drop would be recovered fairly quickly should it burst IMHO.

G.
 
Kenneth, as the others have said, your figures are OK from a logical standpoint with an investor mindset.

What you need to realise is that property for many people has nothing to do with logic - it is all about emotions. Especially from a PPOR perspective. Many people do not buy with an 80% LVR loan. Some OO's pay cash. Some only need a 20% LVR loan to upgrade (they don't even need a valuer to agree with their purchase price).

Cheers, Alan.
 
Hi,

I went to auction an in melbournes inner east... suburb called glen iris.

http://www.realestate.com.au/property-apartment-vic-glen+iris-106571232

Property sold for $522k. very nice street, bigger than normal 2 bedroom unit.


For an investor looking at an L.V.R ratio of 80% I have calculated the below

Purchase Price $522,000
Stamp Duty/purchasing costs $28,000
Loan amount 80% $417600
Cash Deposit Required - $132,400

Interest only loan at 7 % $29,172 per year or $561 per week.

Expenses

Body Corp $2000
Water $600
Rates $600

Total holding cost per annum $32,372

Rental Return Estimate - $19,760 p.a
Property Agent Fees - 6% $1000 p.a

Total Expenses - $33,373
Total Income -$18,760
Deficit Per Annum - $13612 ($261 per week holding Costs)

Other Expenses ( interest lost on deposit for property/ stamp duty)
$132,400 @ 6% p.a = $7,944

I undestand there are tax implications for every individual investor.

But the way I see it the property would need to increase by $21,566 in the first year to just break even.

And If the owner wanted to sell the property to crystalise a profit there would be fees of 2.2% in realestate agent fees, not to mean any capital gains that the owner is liable to pay.

I know property is a long term investment, but one would have to argue that the holding costs of this property are very high and the risk reward doesnt appear to be in the buyers favour over the short to medium term.

Maybe I am missing something here.... maybe this particular property may suit a high income earner who is after some tax breaks and is happy to run an investment at a significant loss cashflow wise.

If interest rates hit 8.5-9%... the numbers look even worse and an investor would be looking at significant cashflow problems, which could hinder future investment, due to lack of power on the borrowing power front.

My analysis doesnt cover everything.. its kind of a simplistic way of looking at things.. and really i just beleive the only reason to purchase this property would be if you beleived the property was going to go up in value signficantly.... in my opinion pure speculation given the lack of rental return. 2.8 % returns seem pretty ordinary... Past performance in glen iris has bee great, but if this was a company trading on the stock market it would be trading on very very very high P.E ratios.


any thoughts would love to hear regarding this purchase at 522k...

My view is that you wouldn't buy an IP here. You can do far better with $500k elsewhere - both for cashflow and probably for cap growth. Most people poo-hoo cheapies in not-so-swank areas.

No, you wouldn't buy it unless you were a high income earner with no financial smarts, or a penchant to be a wangker and boast how you own an IP in Glen Iris. :D

Yeah, the cap growth is pretty good long term supposedly, but the holding costs while you wait will kill a lot of "investors".

Lots of O/O's would buy it, but they have a totally different mindset in most cases. Not many O/O's buy a PPoR with the other strategy of the investment aspect of it - if they do it will be a longer term cap growth strategy.
 
any thoughts would love to hear regarding this purchase at 522k...

Great post keneth, however I think you will find this problem is not exclusive to Melbourne's inner east! I'm sure you could find similar examples of unfavorably priced property in any of our capital cities. In fact I challenge anyone to find a internet listed property in a metro area that even comes close to being positively geared at today's interest rates and prices, there are some out there, but very far and few between.

From a local capital city perspective (Adelaide) I think the investment worthy deals mainly dried up by late 2007. There were some opportunities in early 2009 with the chance to lock in very low rates, but you also had the problem of competing with the FHBs that had flooded the scene with the FHOG boost.

Reality is that buying today in most cases is extremely speculative. You would want to make sure you have a large enough buffer to ride out any bumps in the road like job loss, etc as I think many that have purchased over the last 12-24 months will find themselves in negative equity where highly leveraged.

Coming back to your specific example...really begs the question, WHY? Even if you were purchasing as an OO, is it really worth the additional cost over renting simply so you can put in your own picture frame nails?? It is a ridiculous price to pay and if it was an investor purchasing, then let's hope they have deep pockets and aren't relying on the bigger idiot to buy for more than the huge price they have already paid. I mean seriously, half a million dollars for an average looking unit 13km out from the city?? :rolleyes: You'd have to be stupid.
 
Using your figures from the original post, and assuming a 46.5% tax payer, borrowing 100% of the total cost, the annual holding cost is approx $10k per year, at interest rates of 6.5%, interest only. This rises by roughly $2.5k for each 1% increase in interest rates.

So, let's say a normal holding cost of about $12.5k per year. This tax payer has the option of either investing this $12.5k in the Glen Iris property or on the stock market.

Over 10 years, if the property rises by 4% per year, he'll have approx $200k of equity in the property. To get the same return from investing in the stock market, or any other type of fund, he'd need pre-tax compound growth of about 25%, which is clearly unreasonable, unless he's highly geared.

Cheers
Jonathon
 
Property needs to increase by about $20K to break even. That's only 4%. Given that inflation will give you about 2.5% thats not much land value growth required.

You pay the holding cost to have the possibility of the gain.

$520 K seems a lot for a 2bdr apartment, until you remember the one in Armidale selling for over $700K.
 
Seriously, $500k for Glen Iris? Chicken feed...

Especially when houses are going for that in Broadmeadows. Times are changing folks, $500k is the new $250k. Get used to it.
 
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