potential growth

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From: H T


With the current huge leap in values i've seen in an area that I consider myself to be an "expert" in, I was wondering when the boom will slow.
Consider this. Currently in a bayside suburb in melbourne, you can buy a nice little 2 bedroom vico. place for about 500k. It was only about 5-6 years ago that they were half that cost.

You maybe lucky to currently get (20k) 4% GROSS return on that.

If property is going to slow down in growth in that area to about 10% (typical of inner city prop), in 7 years you have a property worth 1 mill with a potential yield (assuming a typical 3% growth in rent) of about 24,500 and a GROSS yield of about 2.5%

My question is, will anyone in 7 years be wanting to invest in property in these areas in inner melb with returns like that?
With the slowdown in yields, how long before we see this reflected in demand in those areas? ( i know much of it is own.occ)
Will the average 10% growth in property that we've seen since 1960 be in for a fall?
Another reason why prices cant continue to increase at this rate is the lack of wage growth ('cause of low inflation) that has occurred in the last few years
Any thoughts?

HT
 
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Reply: 1
From: Glenn M


H T,

Very good question!!! I believe with these type of yields (and ever decreasing), it won't be long before those people trying to sell the "never negative gear" line will become unstuck.

Sure, it would be fantastic to be positively geared...a loss is after all a loss (though subsidised by the taxman) but it is increasingly rare to find these types of properties. I believe that until rents start to increase significantly, that yields will continue to suffer. This will only happen when a shortage of housing/apartments occurs. But with every man and his dog becoming developers and new properties coming on the market at a significant rate, it will be quite some years before rents start to become competitive again and demand outstrips supply.

Would be interested in hearing other people's views.


GlennM.
 
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Reply: 1.1
From: Paul Zagoridis


I use "never negative gear" as a slogan to offset "let the tenant and the taxman pay your property". Both are oversimplifications.

On 6/22/01 12:37:00 PM, Glenn M wrote:
>...a loss is after all a loss (though
>subsidised by the taxman)

This is what gets me, it is NOT subsidised by the taxman. It is offset against your taxable earnings. No subsidies involved. I don't object to negative gearing as much as the sloppy jargon/thinking.

Low yields in growth cities are a concern. How high is sustainable? Owner-occupiers seem to ignore yield while bidding things up. If you can rent a nice Sydney house at 2.5% how long before people decide to pay rent and put the savings into the stockmarket?

Or how high can values grow at 2.5% yields. Loan affordability and easy bank finance drive that sector. Stamp duty and selling commissions impact owner-occupiers ability to trade up. you need $80K cash to buy a $500K house in Eastern Sydney these days.

DINKS can do it. But if you buy expecting capital growth you need to bet on more people wanting your house down the track and being able to qualify for the finance.

I am not saying it won't happen. I expect median eastern suburbs Sydney houses to crack 7 digits eventually. But it's a scarey thought.

Dreamspinner
 
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Reply: 1.1.1
From: Kevin Forster



If the yield in a particular suburb is getting very low and you think that bayside suburbs are where you get the best potential growth then look at the suburbs surrounding it. Keep looking further out until you get a suburb of much higher yields. If you believe in the ripple theory of growth then these suburbs are the next to boom.

With low inflation and low wage increase it becomes hard for the average person to afford 500k for a house or even 20k for the rent.

The two tier marketers love to plug this sort of reasoning for investing in different cities. Just one question - what state do QLD 2 tier marketers try to sell to QLD investors?

Just my thoughts

Kevin
 
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Reply: 1.1.2
From: Glenn M


Paul,

Yes you are correct. I didn't mean that the government actually hands out a subsidy. I didn't want to get into the complexities of how negative gearing is calculated. All I meant was that a loss is incurred where the investment income is less than cash deductions and non-cash deductions. This can be offset against other taxpayer assessable income. The difference between the tax payable based on the taxpayer's marginal tax rates and the amounts already remitted to the ATO will be refunded to the taxpayer. This effectively offsets some of the cash loss (cash expenses exceeding cash received) during the year. There are also some instances where a Property can be cashflow positive and yet can be negatively geared (large non-cash deductions), but let's not get too technical.

The point I was trying to make is that a loss is a loss, even if some of this is returned via the taxation system.


Glenn M.
 
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Reply: 1.1.3
From: Sim' Hampel


On 6/22/01 1:17:00 PM, Paul Zagoridis wrote:
>This is what gets me, it is NOT
>subsidised by the taxman. It is offset
>against your taxable earnings. No
>subsidies involved. I don't object to
>negative gearing as much as the sloppy
>jargon/thinking.

Hey Paul, have you been hanging around Dunc ?

;-)

 
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Reply: 2
From: Rolf Latham


IPs are not my speciality, but some of the numbers around them are.

Property prices on average in Metro Syd and Melbourne have increased by 7 % for the the last 100 years.

When the yields become small, another usually "unrelated" event(s) cause prices growth to stagnate. In the meantime rental yiedls have increased to once again respectable levels and the economy has recovered and here we go again !

There are alos some societal and demographic changes that will help demadn for rentals over the next two decades

Ta

Rolf
 
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Reply: 2.1
From: Michael Yardney


I'd like to throw in a couple of extra thoughts as a long time investor (30years)and property developer (15 years).
I've heard it all before.
In the late 80's when we were having a boom people said "don't invest in property any more...it's too late because prices are so high that no one will be able to afford it and people won't be able to pay the rents!"
But who would not like to have bought the house that their parents bought at the price they paid for it 10, 15 or 20 years ago.
And believe me in those days the prices they paid seemed expensive.
You become wealthy though the capital growth of your property, not through the rents. The rents just pay the interest.
Let's look at the property example given. The $500K property will(on average) go up $50,000 (compounding ) per year over the next years. And this is tax free and you will be able to borrow against it. So what if you get $1,000 a year less rent in the area. The extra rent won't make you a millionaire, but the capital growth will in 7 -10 years.
You just need to find a property that will be in continuous strong demand by both landlords and tenants. And they like the bayside suburbs.
Michael Yardney
Metropole Properties
 
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Reply: 2.1.1
From: Kevin Forster



True wealth is actually measured using cashflow. If your passive cashflow exceeds your expenses then you are infinitely wealthy.

Capital gains in property are like capitial gains for shares - you get them when you sell. Sure you can access the capital gains and live off them but the interest is then not tax deductible as it was used for a personal purpose.
 
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Reply: 2.1.1.1
From: Paul Zagoridis


Actually Kevin

anybody who went to Steve's Q&A on Saturday saw how to use guaranteed cash bonds to access the equity tax free (and interest stays deductible). Very interesting.

Now I need to get some more growth properties. Nella and I have bought a few income properties this year.

I think a good balance between growth and income is necessary. chasing one at the expense of the other is dangerous.

Dreamspinner
 
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