People still investing in Australian residential property are just plain dumb

[Aceyducey]

Got your attention?

The Reserve Bank said in it's statement to the Productivity Commission Inquiry on First Home Ownership that people investing in Australian residential property were continuing to do so despite gross yields much worse than the comparable yields for local industrial, commercial and retail property.

The residential yields are also well below the yields achievable overseas in residential property.

Doesn't this mean that anyone still investing in the Australian residential property is making a rather poor decision?

As a result, prices of residential property have been lifted to the point where the rental yield has reached an extremely low rate. At present, the gross yields are reported to be around 3½ per cent which means that, after payment of municipal rates, water rates, management fees, strata levies, maintenance, etc., the cash yield is around 2½ per cent or a little lower. The gross yield on residential property in other comparable countries is typically between 7 and 10 per cent. In Australia, the typical yields on industrial, commercial and retail property are 8–9 per cent. These are the sorts of yields required to get professional property investors to invest in property, yet households are investing at less than half these yields.

REF: http://www.rba.gov.au/PublicationsA...ommision_inquiry_on_first_home_ownership.html

What do you think?

Cheers,

Aceyducey

 

[BV]

Acey,

It depends on where people buy these I/Ps.

I believe that If the market cools off, the high end market in the large cities but also country towns and smaller cities will feel it most.

In areas with constant demand, prices will continue to increase regardless of the RBA's intervention.

Its a matter of time before the market cools off and then with such low returns it will be time for the rents to go up.

Its getting time for tenants to start thinking about long term contracts to ensure that their rent will stay at their present low levels.

Bill

 

[D.T.]

Hi,

I found this line to be the most interesting:

Originally posted by RBA
These are the sorts of yields required to get professional property investors to invest in property

I'd be interested in hearing how the RBA defines "professional property investors". And, if they are in fact so professional, why do they require such high yields? Shouldn't they realise capital growth is the root of all happiness?

-Regards

Dave

 

[Glenn]

Jeez,

One of our problems is that there are too many good deals around.....but then again we do a asset value/cashflow analysis on our current situation just about each week to know where we are and how each property will effect us.

It's appreciated that some people don't do this and would never see the freight train that runs them over as they are looking the other way!

Glenn

 

[D.T.]

Hey Glenn,

Perhaps you should set up a fee for people wanting in on some of these deals?

-Regards

Dave

 

[spark]

1) P/E on cash - 20, and is going down.
2) P/E on RE - 30~40 (depends), and rents are going down.
3) Voted no.3 - time will tell...

 

[brains]

Re: Re: People still investing in Australian residential property are just plain dumb

Dave,


Wheres the ambiguity about the definition of 'professional property invetsors'? Theres only one definition and thats investors who earn 100% of their income from investing in property, a small percentage of this forum's members.

I have been posting the same sentiments as the RBA for a while on here - especially the bit about gross & nett returns - and those who choose to ignore the warnings will be burnt the worse. Invest in property now at your peril.


Beside that, assets are usually valued on their yield becaus the cost of holding an assett is intimately connected to the return.

Capital growth is of course where the money is made but professional investors look more to the yield because they realise growth is not always there and they invest all the time so need to rely on yield quite a lot.. This applies regardless of the asset class.

Disclaimer: I am currently negotiationg with NSW Dept. Housing to purchase a few blocks of their land in a regional city at about 60% - 70% market value. I know ive been raving on about it being a bad time to buy property but when a 'screaming buy' pops up - dont ignore it.

Originally posted by dtraeger2k
Hi,

I found this line to be the most interesting:



I'd be interested in hearing how the RBA defines "professional property investors". And, if they are in fact so professional, why do they require such high yields? Shouldn't they realise capital growth is the root of all happiness?

-Regards

Dave

 

[Gill Bates]

link to doco mentioned above has been changed to

http://www.rba.gov.au/PublicationsA...ductivity_commission_first_home_ownership.pdf

( one given gives a 404 ) [ If it moves again , i found this location with th e search function ]

 

[bundy1964]

Re: Re: People still investing in Australian residential property are just plain dumb

Originally posted by dtraeger2k
I'd be interested in hearing how the RBA defines "professional property investors". And, if they are in fact so professional, why do they require such high yields? Shouldn't they realise capital growth is the root of all happiness?

Those people who buy commercial property I think is their view. ATO takes it as being anyone who buys commercial property or has significant residential holdings and takes an active role in there management.

Yield is important it keeps you from having to match people to a phone number for a job Capital gain is the bonus, while yield lets you pay holding costs and eat while not needing to have a job What group do you belong to Dave?

bundy

 

[Lilith]

Billvals,

why would landlord's financial problem become tenant's? If the interest rate keeps climbing and the landlord is having trouble meeting his debt obligations, that is his problem. I reckon rent is determined solely by the force of demand and supply of comparable stocks in the market, is it not? Low yield return, again, is the landlord's problem.

More often than not, when the economy slows down, I see more tenant hopping than rent hiking.

 

[BV]

Lilith,

Its a supply and demand thing.
You see, developers build new properties because they can sell them.

When purchasing demand drops and considering that our population (at least in the larger cities) is on the increase, the demand for rental properties will increase.

What do you think has happened to the current rents?
Due to high vacancy rates, i.e oversupply of rental properties, rents fell (at least in some parts of Sydney)

So If the situation changes, property prices are not increasing, and there are low vacancy rates, what do you think will happen to rents?

I bet they will go up and even exceed their previous levels.
Anyway this is a hypothetical scenario because the conditions are not there for property prices to drop.

And I agree its not fair on the tenants but the market forces always detemine what people pay.

Bill

 

[Jakk]

Re: Re: Re: People still investing in Australian residential property are just plain dumb

Originally posted by brains
I know ive been raving on about it being a bad time to buy property but when a 'screaming buy' pops up - dont ignore it.

People, read and re read the above, as I believe there will be more and more of those "screaming buys" coming up a lot more often, soon.

regards

 

[always_learning]

Re: Re: Re: Re: People still investing in Australian residential property are just pl

Originally posted by Jakk
People, read and re read the above, as I believe there will be more and more of those "screaming buys" coming up a lot more often, soon.

regards

Jakk, why do you think more and more screaming buys will be on offer (on the market)?

 

[D.T.]

Hi Always Learning,

I can only assume that Jakk was referring to people panic selling due to their beliefs regarding market going down / interest going up / sky falling in / yields too low / etc etc.

-Cheers

Dave

 

[brains]

All that as well as forced sales due to rising interest rates, mostly caused by artificial affordability bought about by the FHOG.

Not to mention people not testing themselves against higher interest rates when buying property for the last couple of years and only testing their affordability (or serviceability) at 6.5% and being were fully extended at that rate with PPOR &/or IP purchases.

I think theres a lot more like them out there, especially in Sydney.

A few different friends of mine are in for tough times in the next couple of years for exactly this reason.

Originally posted by dtraeger2k
Hi Always Learning,

I can only assume that Jakk was referring to people panic selling due to their beliefs regarding market going down / interest going up / sky falling in / yields too low / etc etc.

-Cheers

Dave

 

[ocean view]

opinions ???

Those 15% on this poll ! Plain Dumb

Do you think we can be so foolish to buy property & loose that much?
Or have you been a little bit lazy & not done any reasearch.

Well,,, I will just say this...... there should be another poll !
Some people I feel sorry for .. I can not see why you are so negartive towards good business decisions.

Dumb??? On Friday I was a witness to 200 sales of land at say approx $350k each. On sunday some of these buyers re sold their land for 40% more. Now thats dumb.... for 2 days work $100k in the pocket. The only thing dumb here was that these people that sold should of held onto them for another 15 mths becuase they are not due to settle until another 18 mths & they could of doubled their investment for around $1.5k outlay.

I would like to see some of these people call out dumb toe to toe with the above.

I wish some people could be a little more constructive some times on the forum. There are 1000's of great buys every month. If you spent the energy trying to locate them instead of creating a mist on the idea you might of been one of those on friday. I know I had the fog lights on

ocean

 

[abcdiamond]

Hi OceanView

Unfortunately, there will always be a certain number of people who listen to the "experts", and believe everyword they are told.

The problem is; which "experts" do they listen to.

The ones who say that the end is now ? And prices WILL drop.

or .. the others ?
But, do the others, who say "SOME bargains will still be around" actually present themselves as EXPERTS, or just normal people with experience ?

Remember, these people who like to listen to "Experts", may not listen to normal people with quite as much conviction.

I know a few people now, who say that prices are about to drop, because the papers said so !!

The problem with that, is that they will be the ones who try to start the drop, by selling properties cheaper, all because they were told by "experts" that they will lose money if they keep them !!

 

[Aceyducey]

Originally posted by abcdiamond
I know a few people now, who say that prices are about to drop, because the papers said so !!

The problem with that, is that they will be the ones who try to start the drop, by selling properties cheaper, all because they were told by "experts" that they will lose money if they keep them !!

Don't you love self-fulfilling prophecies

and again, perhaps the influence of the media is quite a bit stronger than some people have opined.

Certainly there are several industries that make their money purely on the effectiveness of the media on influencing peoples' views.

Was listening to Radio National a little earlier this morning & hearing about the effect MacLeod's Daughters had on the business of several RE Agents in the country - saved their businesses by making people interested in country properties

Cheers,

Aceyducey

 

[Bill.L]

Hi all,

Brains,

Your statement on your the prospective purchase says it all.

The active investors on this forum have been doing the same over the last few months,buying under value/adding value. That is why some of us have continued to be bullish on property despite the negative vibes that are expounded by some(especially the financial media).

People get enough negativity in their lives as it is, just look at the number of "negative threads" popping up on this forum. We all need to concentrate on the positives, where the good buys are, what type of property, how to add value, how to purchase from the Housing commision and add develop etc.

I'm prepared for the positive. If interest rates rise, thats good. It means we will have higher inflation, which means I can pay off loans in deflated dollars, and rents will rise to give me more of those deflated dollars.

If property prices stabilize or fall slightly I'll keep my eyes peeled for the opportunities that arise, while continuing to add value to existing property, plus paydown loans to increase equity.

If the govt changes the rules of property investing, it probably wont be retrospective. So those that panic and sell, will most likely be worse off when they realise their mistake during the next boom. If there are new rules, we'll accomodate them.

So please Brains while you continue to hold property and continue to pick up the bargains, talk positively about IPs and show and tell others the wisdom of good purchases.

bye

 

[Jakk]

Re: Re: Re: Re: Re: People still investing in Australian residential property are just pl

Originally posted by always_learning
Jakk, why do you think more and more screaming buys will be on offer (on the market)?

G'Day A.L.

As we are all quite well aware, investment in property has been the flavour of the month for the last couple of years and there has been some huge gains made by some and with that come the stories of how easy it has been.

There are so many people out there that would never have even considered property investment a few years ago, that have recently purchased investment property/ies and are awaiting those massive gains that everyone seems to be talking about.

In times of little or no growth, a lot of these first time investors will become impatient waiting for this growth to occur, couple this with rising interest rates and if negative geared as well, they will not be seeing any tangible rewards for their investing endeavours.
A new fangled supercharged quadruple overhead valve version of a VW Beetle Convertable will be released and this newly ordained property investor will feel the need to have one.....problem is that he has this investment property holding them down like a boat anchor around their neck, draining their available cash and thereby making this "must have vehicle" unattainable. Justification will be that "you only live once and we've already got our own home, why do we need another"

The investment property will go on the market, the listed price will be enough to cover all the costs so that there is no loss.
In reality though the price might be a little on the high side.
After some time and no sale, and still no new fangled VW Beetle Convertable in the driveway, self justification of why taking a loss on the sale in order to expedite the vehicle purchase will occur and the first offer that comes in that allows the convertable to be in the driveway that afternoon, will be accepted.

There will be many variables of the above, but basically Property Investment is not a get rich quick solution, (for most), but the way it has been portrayed recently has lead a lot of people to believe otherwise. Those that have entered the market at the latter stages with aspirations of short term enermous gains will become quickly dissilusioned when it doesn't happen.

regards