New investor... a time to be cautious?

Hi folks. Been lurking a while and just signed up for my first post. :)

I'm pretty keen to get into property investment in Sydney (and elsewhere) and have been doing plenty of background reading in the past couple of months. I feel ready to dip my toe into the market except for one thing... there is a lot of conflicting talk about whether the market is over-valued or not.

For those of you who invest in shares, you'll no doubt be aware of a similar argument in late 2006 and early 2007. There were plenty of articles in the paper and on forums discussing whether shares were overvalued. A common line of reasoning was that although the prices seemed high, they probably weren't too far off fair value because the economy was doing well and Australia was different (China etc).

After considering all the arguments, I concluded that this argument was reasonably convincing. In addition, I was investing with a long-term buy-and-hold strategy and it's "time in the market" not "timing the market" right? So invested a chunk of savings (dollar-cost-averaged in) starting at the beginning of July 2007.

Well, we all know how that ended. I am still 20% down on my initial investment, having almost perfectly picked the peak of the market.

So when in comes to investing in property, I am wary when people argue that although prices seem overvalued, they are in fact "fair". Similarly when people point to the opportunity cost of sitting on ones hands, I point to the real cost of entering the market at the wrong time. Even if you buy-and-hold, the fact is that you may lose 5 or more years of time just to get your investment back to its original 'value'.

It's all very well for folks who are already in the market to talk about jumping in and taking action. They have mostly been fortunate to take action at a time where prices have risen steadily. Which of course means, that if prices fall many folks here will still be heavily in profit.

Anyway, to my question... does anyone here advise caution for the next year or two? And what are the best ways of minimising losses in the event of a fall in prices? Obviously on the micro-level you need to buy well. But are there particular types of investment which are likely to fall less.... eg. suburban areas within 15km of the CBD and prices in the $200k-300k range? I'm wondering if I might be better holding off till 2011 and just see what happens in the meantime.

Your thoughts are very much appreciated. Let me tell you, it's not fun saving up for an investment only to watch years of savings disappear steadily from the balance sheet. Investment Rule number 1 for me is definitely: do not lose money!
 
Anyway, to my question... does anyone here advise caution for the next year or two? And what are the best ways of minimising losses in the event of a fall in prices? Obviously on the micro-level you need to buy well. But are there particular types of investment which are likely to fall less.... eg. suburban areas within 15km of the CBD and prices in the $200k-300k range? I'm wondering if I might be better holding off till 2011 and just see what happens in the meantime.

I would advise caution. I would look at buying when interest rates have hit their peak or close too. I know time in the market is important and if prices do go down you have not made a loss unless you sell. I reckon prices will moderate as interest rates rise.

Properties in the $300k-$500k market do not go down as much as properties in the $1.5m market.
 
Hi folks. Been lurking a while and just signed up for my first post. :)

After considering all the arguments, I concluded that this argument was reasonably convincing. In addition, I was investing with a long-term buy-and-hold strategy and it's "time in the market" not "timing the market" right? So invested a chunk of savings (dollar-cost-averaged in) starting at the beginning of July 2007.

Well, we all know how that ended. I am still 20% down on my initial investment, having almost perfectly picked the peak of the market.

So when in comes to investing in property, I am wary when people argue that although prices seem overvalued, they are in fact "fair". Similarly when people point to the opportunity cost of sitting on ones hands, I point to the real cost of entering the market at the wrong time. Even if you buy-and-hold, the fact is that you may lose 5 or more years of time just to get your investment back to its original 'value'.

It's all very well for folks who are already in the market to talk about jumping in and taking action. They have mostly been fortunate to take action at a time where prices have risen steadily. Which of course means, that if prices fall many folks here will still be heavily in profit.


Your thoughts are very much appreciated. Let me tell you, it's not fun saving up for an investment only to watch years of savings disappear steadily from the balance sheet. Investment Rule number 1 for me is definitely: do not lose money!

Welcome ashleigh,

My advice: Buy when YOU are ready. :)

Can I first point out (where highlighted) this cannot be further from the truth. I am not sure why you think this as most real investors here are long term and have seen times of no growth. In NSW alone, there has practically been no growth for 4 years up until this year.

You yourself have worked out that investing in property is a Long term project.

You have also answered your own question in regards to when to buy and the truth is: no-one really knows. You will get opinion after opinion about when to enter the market.

If your strategy is Buy and Hold, then no matter when you buy- you are going to have periods of no growth Versus periods of high groth with EVERY property.

I have my own little bets on a particular suburb far north that I think is a sure thing. Others here may say not.

It is true that properties with easy access to transport, shopping centres, hospitals and especially water will easily appreciate - with some more than others. If you can afford waterfront - there's your best bet! However, if you wish to lower your risk- then stick to basic residentials. No multi-units in high development areas.

Strategies for Lowering your Risk.

1. Insurance - Income, Landlord and House.
2. Fixing Interest Rates (although I think you have missed the boat here, personally.)
3. Lower LVR 70% if possible. The lower the better.
4. Buy in residential area (def not rural) with high demand for tenants.
5. Buy as close to positively geared as you can.

If you are buying now and if your property drops by 10% in the next year - Like shares: You will only lose if you sell.

Regards JO
 
I've been where you are and this is not advice, just observation.

Even in the worst economic collapses, property only goes down by about 50%. It never becomes worthless. Many shares do, even the very valuable ones that seem safe, like Poseidon, or Enron for history buffs, or the 160 year old too large to fail Lehman Bros.

The worst that could happen with property other than if society totally collapses is that value goes sideways for a number of years and inflation puts interest rates up and up. If you have tenants, such rises could wipe out their rental contribution to your debt clearance or maintenance.

Considering the history of land and housing prices (lots of threads on this forum), on the balance of probabilities, housing and land will continue to gain value overall in the long term. If you're choosing housing for investment, the challenge is in finding good value that is affordable for you and holdable by you for the period you decide upon. (ie for the kids, or a 10 year cash realisation).

All indicators appear to point to housing price growth in a lot of areas of Oz for the next 1-3 years, with the proviso that there is a big scary shadow cast by USA and China on our economy, which could cause house prices to drop. Appreciation of this risk to point one above is the fear factor.

There are many wise words on this forum and they are very helpful in decision making. Personally I think buying carefully and buying cautiously in real estate is a good move, and advice I found here to buy under median in a rising area was paramount. The second bit of advice, and equally important, was that there is no real hurry to buy - the ideal property investment for you will continue to be available.

Good luck with your choices.
 
How do you know rates have hit their peak?

Probably when there is talk that rates may start to come down because inflation is well under control and housing starts have slowed and the number of new home loans have fallen and unemployment looks like increasing too much.
 
I would look at buying when interest rates have hit their peak or close too.

I don't follow the logic??

I would look at buying when rates are at their low point and prices are at their low point.

Late last year was a good time in Melbourne.

And why the talk of falling prices, they've already fallen, and they're going UP now?!
 
I don't follow the logic??

I would look at buying when rates are at their low point and prices are at their low point.

Late last year was a good time in Melbourne.

And why the talk of falling prices, they've already fallen, and they're going UP now?!

My logic is that over the past 3-4 months property prices have risen to pre-GFC levels. I now only expect more interest rate rises.
 
Investment Rule number 1 for me is definitely: do not lose money!
IMO then just keep your money in the bank. No investment comes without risk of capital loss.

I'm wondering if I might be better holding off till 2011 and just see what happens in the meantime.
I think this would be the right move, there is not much (if any) room for houses to climb higher than where they are without significant increases in wages and demand.
 
Hi folks. Been lurking a while and just signed up for my first post. :)
Good on you :)

I'm pretty keen to get into property investment in Sydney (and elsewhere) and have been doing plenty of background reading in the past couple of months. I feel ready to dip my toe into the market except for one thing... there is a lot of conflicting talk about whether the market is over-valued or not.
You have to screen out the "noise" from the facts. Who is doing the talking? What are their vested interests? (applies to me as well).

Well, we all know how that ended. I am still 20% down on my initial investment, having almost perfectly picked the peak of the market.
Happens to the best of us. Congratulations for having a go. You are only 20% down - some people got wiped out. Another little while and you will most likely recover that 20% as well. You just survived a 1 in 80 year event and only took a 20% hit. You should be dancing!

....Even if you buy-and-hold, the fact is that you may lose 5 or more years of time just to get your investment back to its original 'value'.
You are based in Sydney - right? 2003/4 was the peak of the market. If you had purchased then, you would have spent the next 5 years watching your IP go up 5% one year, down 5% another - overall pretty flat. Only this year in 2009 would you be back to where you started + a little bit. In my opinion we are into the next growth phase now.

Anyway, to my question... does anyone here advise caution for the next year or two?
Yes - me. But I always advise caution, followed by research, followed by action. I would not advise caution followed by long periods of sitting on your soft white hands, doing nothing.

And what are the best ways of minimising losses in the event of a fall in prices?
Prices are not falling - they are rising. :rolleyes: In the event of a fall:
1. Make sure you haven't gone nuts with your LVR - like 97% and maybe triggering a "margin call" from your lender - very unlikely btw.
2. Buy at or below the median price of the suburb
3. Be careful on selection criteria - not on a main road, backing onto a railway line, etc - those sorts of things.
4. Don't sell and crystalise a "loss"
5. Have a cash buffer - all the risk mitigation issues
6. Be prepared to hang in for a minimum of 7 years to ride out the peaks and troughs.

I'm wondering if I might be better holding off till 2011 and just see what happens in the meantime.
Dumb plan in my opinion. What if the market continues to rise as it has been for the last 12 months? Then what? Do you not buy in 12 months time in the hope that prices will come off again at some point in the future?

There will always be a reason not to buy now if you think about it long enough.

Your thoughts are very much appreciated. Let me tell you, it's not fun saving up for an investment only to watch years of savings disappear steadily from the balance sheet. Investment Rule number 1 for me is definitely: do not lose money!
Or 'preserve capital" as Warren Buffet says. The reality is that there is no such thing as a risk-free investment. If you invest in the share market you will lose money. But if you do it successfully, say on 10 shares you will make money on 8 shares and only lose on say 2.

If you cannot cope with the possibility of losing money then you have to reassess your risk profile and maybe shares are not for you. Maybe property isn't for you either?

Maybe you need to lick your wounds and put on a bandage or two and get back up in the game. Or sit on the sidelines and watch the other players and wonder 'what if?'. It is up to you.
 
15km to the city between $200-300k..??

Just thinking outloud, maybe should have done some research before putting my opinion across..But at this point i'd be saying goodluck!

But i guess it depends what you're looking for, but i'm thinking you're way off the mark especially that close to the city. Go for $400-500k..? But i guess what you're looking for again, not sure.

As for risks, you've got to take them to make anything out of this game, and you will incur loses, some perhaps more regularily than others, but that depends where you're choosing to invest as well..But if you're looking city wise you're pretty safe in my opinion because there will never be a shortage of people looking for a rental unlike in say, Moree?

But then it goes back to what's a fair price, personally i like mortgagee auctions :p I haven't bought, but so far so good for the parents.
 
Congratulations Ashley, you've just learned the most important investment lesson.

Buy in gloom, sell in boom.

It's the best insurance you can have to protect your capital.

Easier said than done though, as you've already found out.
It takes a fair bit of conditioning to make yourself think and act in the opposite manner to the rest of the flock. Once you master it you wont go wrong no matter what it is that you are trading.

Did you keep dollar cost averaging through the sharemarket bust??

RC
 
thanks

Thanks all for your comments. I'll try to respond to a few of the points raised below, but it is all good food for thought.

Can I first point out (where highlighted) this cannot be further from the truth. I am not sure why you think this as most real investors here are long term and have seen times of no growth. In NSW alone, there has practically been no growth for 4 years up until this year.

Yes, I realise that prices in Sydney and much of NSW have been flat for the past 4 years or so. What I meant to convey was that many investors have benefited from the huge upsurge in prices in the early part of the decade. As I have learnt from my sharemarket experience, you do not want to decide to join the party only to find it's over and you are stuck cleaning up the mess! If you're going to cop a fall then you want to enjoy some of the upswing first so that it all evens out.

You have also answered your own question in regards to when to buy and the truth is: no-one really knows. You will get opinion after opinion about when to enter the market.

If your strategy is Buy and Hold, then no matter when you buy- you are going to have periods of no growth Versus periods of high groth with EVERY property.

If you are buying now and if your property drops by 10% in the next year - Like shares: You will only lose if you sell.

Regards JO

Yes, understood. No one can predict which way prices are going to go. But at the moment there seems to be considerable disagreement as to whether houses are overvalued or not. Whereas in the USA almost everyone would agree that houses have fallen to levels where the price is either fair or below-value (pls correct me if I'm wrong on this point!).

Obviously from an investors point of view it is desirable not to buy at a time at which (in hindsight) assets are overvalued. Although you can't know what is going to happen in the future, maybe it pays to avoid investing at times when prices appear overvalued (on historical trends) and just be patient. I knew in 2007 that stocks were somewhat above historical fair value (probably only 10-20%?) but was keen to get into the market because I didn't want to sit on my hands whilst the economic outlook for Australia was bright. If you subscribe to the Buffett school of thought then patience is a virtue in investing, and it's worth waiting for a bargain. On the other hand, if you wait too long you may well regret missing out on the gains if significant falls do not happen in the following decade!
 
Even in the worst economic collapses, property only goes down by about 50%. It never becomes worthless. Many shares do, even the very valuable ones that seem safe, like Poseidon, or Enron for history buffs, or the 160 year old too large to fail Lehman Bros.

Only going down by 50% is exactly what concerns me! Because of the volatility of shares I haven't been game to apply any leverage. So when my shares lose 50% of their value I do too. They may go to zero (actually they won't because I only invest in passive broad-based index funds), but that's the worst it can get. With a $500,000 unit at an 80% LVR, if the house loses 50% then I have just lost 250% of the value of my initial investment. Shares are limited to 100% :) But I get what you mean.

All indicators appear to point to housing price growth in a lot of areas of Oz for the next 1-3 years, with the proviso that there is a big scary shadow cast by USA and China on our economy, which could cause house prices to drop. Appreciation of this risk to point one above is the fear factor.

There are many wise words on this forum and they are very helpful in decision making. Personally I think buying carefully and buying cautiously in real estate is a good move, and advice I found here to buy under median in a rising area was paramount. The second bit of advice, and equally important, was that there is no real hurry to buy - the ideal property investment for you will continue to be available.

Good luck with your choices.

Thanks! From reading this board (and books) this seems to be a sensible strategy.

It's a pity it is harder to cost-average into the housing market than it is into the share market. This would certainly reduce the risk of accidentally investing at the peak. In order to do so though I would need to buy properties for around the $100,000 mark... which puts me well into rural areas, which are more volatile/risky anyway. Probably not ideal for a novice property investor.
 
Prices are not falling - they are rising. :rolleyes: In the event of a fall:
1. Make sure you haven't gone nuts with your LVR - like 97% and maybe triggering a "margin call" from your lender - very unlikely btw.
2. Buy at or below the median price of the suburb
3. Be careful on selection criteria - not on a main road, backing onto a railway line, etc - those sorts of things.
4. Don't sell and crystalise a "loss"
5. Have a cash buffer - all the risk mitigation issues
6. Be prepared to hang in for a minimum of 7 years to ride out the peaks and troughs.

lol, yes, prices have a habit of rising... until they start falling! Your points are good ones though and are all on my list. I'll make sure I have things set up so I can ride out big hikes in interest rates and significant falls in value of the property.

Dumb plan in my opinion. What if the market continues to rise as it has been for the last 12 months? Then what? Do you not buy in 12 months time in the hope that prices will come off again at some point in the future?

I think the plan would be to wait 12 months to see what the state of the world economy is. It seems to me that our housing market is unlikely to collapse in the absence of a further global economic trigger which leads to job losses here. Prices may stagnate, or rise, but won't fall significantly unless unemployment goes up significantly. That's my theory anyway, although I take my theory with a big grain of salt as I am entirely unqualified to make such pronouncements. ;)

If in 12 months the world economy -- China, US in particular -- is looking healthier, then it might be a better time to buy. But yes, this strategy could play out for several years without making a purchase. If I was to wait for significant price drops I could be waiting a while. I'd more likely just wait for the general economic gloom just to lift a little bit more. Having said that, undoubtably we won't see the next crash coming either. It will probably be some bubble bursting in China, which will hit us hard in Australia. Who knows!

If you cannot cope with the possibility of losing money then you have to reassess your risk profile and maybe shares are not for you. Maybe property isn't for you either?

Maybe you need to lick your wounds and put on a bandage or two and get back up in the game. Or sit on the sidelines and watch the other players and wonder 'what if?'. It is up to you.

I think my postings so far make me sound a little more timid than I actually am. I can certainly able to cope with the possibility of losing money. During the crash my investments lost almost 50% of their value and I was not at all tempted to sell. I didn't lose any sleep over it either, because I had (wisely I think) only invested in index funds. So the news of individual stocks (eg. Babcock and Brown) getting annihilated didn't affect me directly.

Similarly, I'd be more than happy to jump into the share market with some more money right now, as I think shares are good value at the moment. However, I've come to the conclusion that I'm not going to get wealthy through stock market investing because I'm not willing to leverage into something which can crash overnight. The monetary opportunities in property seem much larger due to the leverage which is available.

Of course, the leverage applies to the risk side too. I'm just trying to be cautious because losing the odd $100,000 would really hurt (I've only got about $130,000 of assets!).
 
15km to the city between $200-300k..??

Just thinking outloud, maybe should have done some research before putting my opinion across..But at this point i'd be saying goodluck!

But i guess it depends what you're looking for, but i'm thinking you're way off the mark especially that close to the city. Go for $400-500k..? But i guess what you're looking for again, not sure.

It's quite doable I think, depending on what you want to buy! Lakemba is 15km from the Sydney CBD and it's not hard to find properties there for under $300k I believe. Units, of course.
 
It's quite doable I think, depending on what you want to buy! Lakemba is 15km from the Sydney CBD and it's not hard to find properties there for under $300k I believe. Units, of course.

Which i why i said i was thinking outloud and hadn't done any research and that it depends what you're after.

So yes if you're after a studio apartment that's not going to have alot of CG then sure, it's doable, or you can buy a 3b house further out.

But as i said it depends what you're after, i wasn't sure what you were looking at, but as i said, studio's don't tend to have much increase, but then again if you happen to find a sad looking apartment, say 2b, in Lakemba or there abouts for under $200k-300k and are happy to put in work and pretty it up, then yes CG will be much more and then you can benefit from higher rent etc. But i wouldn't be buying anything in a move in condition if you're looking at adding value, especially when it comes to appartments.

Just my thoughts, may not be accurate, as i said i'm thinking outloud.
 
Congratulations Ashley, you've just learned the most important investment lesson.

Buy in gloom, sell in boom.

It's the best insurance you can have to protect your capital.

Easier said than done though, as you've already found out.
It takes a fair bit of conditioning to make yourself think and act in the opposite manner to the rest of the flock. Once you master it you wont go wrong no matter what it is that you are trading.

Did you keep dollar cost averaging through the sharemarket bust??

RC

Yes, I fully subscribe to the buy in gloom scenario. If prices has fallen 20% in the past year, then I would be in like Flynn. But we're not really in a gloom scenario right now are we? And when was the last time house prices in Australia fell by 20%? Was it back in the early 90s? I don't want to be hanging around till 2020... not worth the opportunity cost is it!?

I certainly decided to try and avoid buying after there have been several years of impressive gains. When looking through suburb data I specifically exclude suburbs that have done well in the past couple of years. That lesson is firmly ingrained! But the share market experience has taught me that you need to pay attention to "macro" factors. Because you can pick up the best "bargain" relative to the current market and still be losing a lot of money if the market as a whole is overvalued.

So, do I take it from your comments that you would advise holding out for better opportunities? The difference between buying at the end of a boom, and buying near the bottom of a crash is really quite astounding.

Regarding the cost-averaging through the bust... I ran out of cash! I put down a third of my investment at the beginning and then averaged the rest in over 6 months. That was a mistake and I shouldn't have been so impatient. A timeline of two years would have been more prudent. So I missed the bottom because I'd run out of powder. Not the only one, I suspect :eek:
 
I think the plan would be to wait 12 months to see what the state of the world economy is.

That's what people said 12 months ago.

Property prices in Melbourne have gone up 30% or more since then in some suburbs, possibly less in Sydney though.

As for gloom, that was late last year, you must have missed all the press coverage back then.

I feel that you're not quite understanding where we are in the ''economic cycle'' with respect to property...
 
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