Melbourne Market--Reality Check?

[evand]

To say a property that sells for $385k is worth $450k is plain wrong. It is worth $385k

If you follow that logic, you could say its worth $600k as well. At some time in the future.

The value (or lack of) negative cashflow in a falling market is another debate altogether.

As for buying property valued at 385k when it was worth 450k....there is still
a large negative cash flow...in the order of $160-$200 pw. The question is whether the opportunity cost of putting your money vs somewhere else.

Cheers
Sash

 

[sash]

Agreed....and I would even go so far as saying it is even harder to value properties now given the current environment.

As most banks panel valuers will tell you...in this evironment it is harder to value the better suburbs...as it is emotion that drives these prices.

As for negative cash flow.....yes it is a interesting debate! No doubt some forum members will be educated on when a they experience a cash flow crisis...happens everytime without fail!

Cheers
Sash

To say a property that sells for $385k is worth $450k is plain wrong. It is worth $385k

If you follow that logic, you could say its worth $600k as well. At some time in the future.

The value (or lack of) negative cashflow in a falling market is another debate altogether.

 

[feihong]

Michael,

The properties in the Eastern suburbs of Melbourne are truly tanking...whilst I am sympathetic and agreement about the longer term. I cannot see a floor for this product yet.....

Whilst well located prime property might work well in good times as capital growth is great....it might not be so great in harder times due to the cash flow bleed. Add to this...rising professional unemployment likely to affect this demographics as evidenced by news paper reports of late....and you have a potentially volatile market.

I have always been a cash flow player.....it now seems that whilst I have had moderately good growth on my places in Western Melbourne...my time in the sun has come via my properties in Melton and Wyndham....listings there are now hard to get. I suspect it is being driven by a combination of people not upgrading due to the economic situation and FHOG.

Would love to hear....how you expect the prime Eastern Melbourne suburbs to perform this year. You may have to pardon my cynicism....as I can't see the wisdom of getting into bluechip Eastern suburbs....as property prices are trully coming off as they did go up by 60% in the last 3-4 years as opposed to the Western suburbs which did about 30%.

Would love to hear your take on this?

Cheers
Sash

Depends on wherabout of Eastern suburbs. I have ethnic bias, because I know that top 1% of of wealth hierachy in Asian countries have specific places they wanted to buy and money seems to be flooding in recently due to low AUD. As the result I'm seeing some places holding up relatively well. Places which were dominated by young professionals who just entered the market last year with massive leverage are the ones that will suffer most imho (low yield doesn't help either). As for investment strategy I agree with your cashflow strategy wholeheartedly.. I am still a newbie compared to you but my logic did lead me to lower end investment properties.

 

[J Martin]

To say a property that sells for $385k is worth $450k is plain wrong. It is worth $385k

If you follow that logic, you could say its worth $600k as well. At some time in the future.

The value (or lack of) negative cashflow in a falling market is another debate altogether.

Exactly right. The "market" has now decided that the property is worth $385,000. Assuming the properties are the essentially the same, the buyers who bought in at the 400s have bought a property worth $385,000 or thereabouts. They've made a bad buy, rather than a good one. Market dynamics work exactly the same way on the way down as the did in the heady days on the way up.

 

[evand]

Actually, that's a better way to put it. The guys that bought the units over $400k paid too much. The guy that paid $385k paid market. Today's market.

A story can be spun any number of ways to promote a particular view point.

Exactly right. The "market" has now decided that the property is worth $385,000. Assuming the properties are the essentially the same, the buyers who bought in at the 400s have bought a property worth $385,000 or thereabouts. They've made a bad buy, rather than a good one. Market dynamics work exactly the same way on the way down as the did in the heady days on the way up.

 

[DavidMc]

To say a property that sells for $385k is worth $450k is plain wrong. It is worth $385k

You're not telling the whole picture...

It was worth $385k as a property that was:
- Sold by a desperate seller
- Sold on a bad weekend in the market in general
- Sold with tenants in place (excluding OO's and FHO's)
- Sold at the same time as two other near identical properties

If it was the only one for sale that weekend, it would have sold (and therefore been 'worth') at least the price the first went for, i.e. $425k. It probably would have been sold for a little more as the purchaser of the second one might have bid $430k. In an auction you only find out the 2nd highest bidders highest price.

If it was sold without tenants, it probably would have been sold for a little more again as the number of potential purchases would have gone from 30%-50% (allowing for some home owners who are happy to wait out the lease) to 100% of the market.

'Yeah, but it wasn't!' I hear you say. All I'm saying is in this game there is no 'value' set in concrete. It's not the sale price and just the slightest change in circumstance could have meant that $385k property sold for much more.

That investor got a great price, wish that was me.

 

[GoAnna!]

You're not telling the whole picture...

It was worth $385k as a property that was:
- Sold by a desperate seller
- Sold on a bad weekend in the market in general
- Sold with tenants in place (excluding OO's and FHO's)
- Sold at the same time as two other near identical properties

If it was the only one for sale that weekend, it would have sold (and therefore been 'worth') at least the price the first went for, i.e. $425k. It probably would have been sold for a little more as the purchaser of the second one might have bid $430k. In an auction you only find out the 2nd highest bidders highest price.

If it was sold without tenants, it probably would have been sold for a little more again as the number of potential purchases would have gone from 30%-50% (allowing for some home owners who are happy to wait out the lease) to 100% of the market.

'Yeah, but it wasn't!' I hear you say. All I'm saying is in this game there is no 'value' set in concrete. It's not the sale price and just the slightest change in circumstance could have meant that $385k property sold for much more.

That investor got a great price, wish that was me.

Agree although IF the property is still highly negative I wonder if the numbers would be better again if purchased closer to the next property growth phase. Holding costs can very quickly eat away that initial "instant equity"

 

[J Martin]

You're not telling the whole picture...

It was worth $385k as a property that was:
- Sold by a desperate seller
- Sold on a bad weekend in the market in general
- Sold with tenants in place (excluding OO's and FHO's)
- Sold at the same time as two other near identical properties

If it was the only one for sale that weekend, it would have sold (and therefore been 'worth') at least the price the first went for, i.e. $425k. It probably would have been sold for a little more as the purchaser of the second one might have bid $430k. In an auction you only find out the 2nd highest bidders highest price.

If it was sold without tenants, it probably would have been sold for a little more again as the number of potential purchases would have gone from 30%-50% (allowing for some home owners who are happy to wait out the lease) to 100% of the market.

'Yeah, but it wasn't!' I hear you say. All I'm saying is in this game there is no 'value' set in concrete. It's not the sale price and just the slightest change in circumstance could have meant that $385k property sold for much more.

That investor got a great price, wish that was me.

Let's put it another way. 3 similar units went for auction. Unit 1 and 2 sold for $250,000 each at auction. There was no bidder for the third. However, a few weeks later a buyer comes in and buys the third for $280,000.

Now, what are the properties worth? I guarantee buyer of unit 1 and 2 would believe they have "created" a magical $30,000 in instant equity and their units are "worth" $280,000. I guarantee the buyer who bought at 280 would not think it is worth 250. Further, RE agents, valuers, somersofters etc would now attempt to sell any similar future units based on that new benchmark of $280,000. Yet the reverse cannot happen; it becomes an aberration, a desperate seller, something to be ignored. I can guarantee new benchmarks on the way up during the boom were not ignored.

But what it really worth? The simple answer. "It is worth what someone is willing to pay" and the market is dictated by a small number of buyers. You can close your eyes, cover your ears and shout to the rooftops that the unit in Michael Yarley's example is worth $450,000, but if "the buyers aren't willing to pay 450, it aint worth 450!"

Unfortunately, you can't have it only one way. If the market dictates increasing prices on the way up, the same logic will and does apply on the way down.

 

[evand]

There's a thousand variable you can apply to the sale of any property and even more hypothetical "ifs" and "buts" but the point is it sold for that much on that day.

That's all that really matters to anyone that's interested.

You're not telling the whole picture...

It was worth $385k as a property that was:
- Sold by a desperate seller
- Sold on a bad weekend in the market in general
- Sold with tenants in place (excluding OO's and FHO's)
- Sold at the same time as two other near identical properties

If it was the only one for sale that weekend, it would have sold (and therefore been 'worth') at least the price the first went for, i.e. $425k. It probably would have been sold for a little more as the purchaser of the second one might have bid $430k. In an auction you only find out the 2nd highest bidders highest price.

If it was sold without tenants, it probably would have been sold for a little more again as the number of potential purchases would have gone from 30%-50% (allowing for some home owners who are happy to wait out the lease) to 100% of the market.

'Yeah, but it wasn't!' I hear you say. All I'm saying is in this game there is no 'value' set in concrete. It's not the sale price and just the slightest change in circumstance could have meant that $385k property sold for much more.

That investor got a great price, wish that was me.

 

[Property Meister]

maybe a rental figure might help peoples perspective on this>????

so that it can be compared to the market and surrounding properties

 

[sash]

Ditto....in a soft market bluechip property should get about a 5% return. That means 385 pw rent....on a 385k purchase.

Cheers
Sash

maybe a rental figure might help peoples perspective on this>????

so that it can be compared to the market and surrounding properties

 

[gman65]

The market is a liquid thing.. the market is also not always logical when it comes to something like property where emotion can come in for a large proportion of buyers to push prices one way or another.

At that moment in time those properties are valued at 385/425/425. This is now.

However I think the main point is that you would have to consider what would happen in a strong market in 5 years or however long? Assuming they *all* can fetch $550k in that market, and there is high demand at that point, each one may fetch $550k.

So who is the one better off? The one who started off with only a $385k loan (less deposit of course), and paid interest on that for 5 years? or the bloke who paid $425k and paid interest on a loan of $425k?

Assuming they at that point receive $550k each, it's pretty obvious who got the better deal to me

 

[Michael Yardney]

Hi Michael

There's some good advice there - thanks for contributing. Do you have any information on the yields generated by these properties at these prices? We can all then perhaps make our own judgements on whether these are good investments based on "fundamentals".

Otherwise we just end up arguing (again) about whether one person's good cashflow is another person's bubble!

I guess I may not have made myself very clear. I initially responded to someone asking has the market bottomed. Of course I don't know and I suggested that the answer is NO!

So why even consider buying?

Becuase there are opportunities around that "may" be so cheap today that if the general market falls further, you are still covered.

Sorry - i don't know what the rental returns and yields were, but assuming they rents were similar, clearly investor 3 got a much better yield.

 

[mikew]

Has the market bottomed?
The first property sold at $425,000 with a few keen bidders pushing up the price. The second very similar apartment was passed in at auction and sold just after for $405,000.

The last apartment was also passed in – there were no buyers left and no one bid for this property. It was sold a few weeks later to a canny investor for $385,000

What lessons can we take from this?

1. The new market value is $385,000 (last price market was prepared to pay).
2. Buyer 1 has 385,000 - 425,000 = -40,000 negative equity.
3. Buyer 2 has 385,000 - 405,000 = -20,000 negative equity.
4. Last year's buyers at 450,000 have -65,000 negative equity and have paid a year's costs.

Is this how it works?

 

[Max Carnage]

Is this how it works?

Not unprecisely.

 

[DavidMc]

I guess I may not have made myself very clear. I initially responded to someone asking has the market bottomed. Of course I don't know and I suggested that the answer is NO!

I asked about your 'perception versus reality' graph during an upswing and do you think it is true for the reverse also?

In other words, in your experience, in a downswing, does the herd think we've hit bottom too early or too late than actual?

 

[HiEquity]

So I guess the take home message here is that you can buy under market valuation in a rising market but you can't in a falling or uncertain market? Michael's example was of identical properties bought at roughly the same time with different prices attached. This doesn't mean the market dropped that much in the space of a few days! Someone got a good deal and someone else didn't.

Anyone who says it is "impossible" to buy under the market hasn't done it. Just because you haven't don't assume others can't. You can do it in any market - it is certainly a skill worth developing as it gives you breathing space in case the market does go against you. Perhaps it would be a better use of this Board to discuss how to do it so we can all learn, particularly in Melbourne at the moment?

 

[ffc1883_1996]

1. The new market value is $385,000 (last price market was prepared to pay).
2. Buyer 1 has 385,000 - 425,000 = -40,000 negative equity.
3. Buyer 2 has 385,000 - 405,000 = -20,000 negative equity.
4. Last year's buyers at 450,000 have -65,000 negative equity and have paid a year's costs.

Is this how it works?

You are correct if you assume that the three properties are all actually ING savings accounts, each with a balance of $385k. With this assumption, the buyer who paid $385k is the only one who paid market price and the others all have negative equity.

 

[willfong]

Market price is the price that the buyer and seller in the market are willing to make the deal at, and it's normally set at the marginal buyer/seller. When there is a buyer (1st buyer) willing to buy it for 425k then market price was 425k, but the fact that there were additional stock for sale and the 1st buyer was no longer willing/able to pay that much for another one and the seller is willing to accept a lower offer for the 2nd and 3rd unit means the market for that property has moved down within that same day (assuming they are identical, even the conditions).

The market is not always rational, but 385k was the market value at the end of that day. It may move up or down the next day. Some people may think at that market price it's very good value and think it's underpriced, other might have opposite view and both will have their own reasons.

 

[DavidMc]

I've been looking at PS3's for sale on eBay. The cheapest one went off at $380, brand new in box. It happened just a few days ago.

Does that make the market price of a PS3 $380? Well, if you wanted to get technical, yes it was for that second in time. But, is it practical to think that you can go an replicate that purchase at that price point? You could be looking for a while.

Harvey Norman, Kmart, Big W, JB and DSE sell the same model for $600 - $700 and make bugger all margin on them. They usually sell on eBay for $450+.

History has proved this PS3 was a once off and that is the question. Given the circumstances surrounding this purchase, I think this property at this level of discount was a once off too although time will tell. Sure, the trend may be downward but on that day that was a big price difference compared to two very similar properties.

It seems everyone is more interested in getting 'technical' rather than hearing from a 'practical' multi-millionaire property investor with decades of experience.

(In fact, Sony sell the hardware at a loss in the first place...)