Professor Sepius nefas claims Property Burst this year!

[BayView]

BayView - when you buy a house in 1985 I guess it doesn't really put you in the same category.

Oh? why is my situation any different to anyone elses over history? property didn't suddenly become expensive last year. It has always been the same from my experience.

I'll look forward to picking up the stock of those who bought in 2010. As for your question of why do I come onto here? To discuss about profitable strategies such as buying off forced-sell owners who bought in 2010

This strategy has been going on since god was a boy. It happens when home owners have to sell. It doesn't happen just because a house value drops.
One of my friends in L.A still owns his house; despite the supposed big crash in the US. He doesn't have to sell. He bought it back in about 1980 and now owns it outright.

I don't know why people get so offended when someone suggests prices might crash.

It's not that people say they might crash. We all know they might. It's the position the person is coming from who says it. For example; I have already said in a roundabout way that I have been around for a very long time and have yet to see the crash you speak of occur here. In a very small percentage, there are some transactions where people can lose a lot, but this is usually their own error in how they invested; too high an LVR, too little cashflow etc.

Would people feel happier if I said it's all going to rise?

I've already illustrated that it does. Real life experience of over 25 years. What's yours?

You listen to what you want to hear

I listen to all, but only strongly disagree with those who are of little to no property experience, and are more likely to be an armchair expert and make wild statements.

 

[hobo-jo]

Deltaberry, I don't think anyone here minds discussions about falls in property prices. Everyone knows there is always some softening in prices after significant rises in short timeframe.

Referring to house price falls/stagnation as "softening prices" is just as outrageously bias as the bears expecting a "price crash". It's likely neither of these terms will accurately describe the situation we see over the next several years.

As per discussion and figures in this thread an investment property in Melbourne could easily cost you over $100k (in interest and expenses over and above rental income) in a situation like the early 1990s where it took 7 years for housing to recover to a price above their last peak.

Can you afford to lose $100k (after tax benefits) over the next 5-7 years while experiencing no growth in the assets value? This is a potential reality for many investors buying at today's prices and if lending figures are anything to go by investors are buying approximately 1 in 2 homes in Melbourne! Does this sound healthy to you? The potential reality for new investors is grim without the need to refer to outrageous expectations of a 40% fall in nominal prices.

But it seems the discussion almost always goes to the extreme where as soon as you start talking about fall in property prices it seems the bears think it's gonna be 40%+ without even putting good arguments.

I'm not denying that there have been users on Somersoft in the past (& probably present) quoting/expecting 40% falls, however saying that discussion about price falls almost always goes to the extreme on this site is not very accurate in my opinion, there has been plenty of discussion recently about the potential for price falls without extremist positions being rampant:
http://www.somersoft.com/forums/showthread.php?t=63529
http://www.somersoft.com/forums/showthread.php?t=62805
http://www.somersoft.com/forums/showthread.php?t=62223
http://www.somersoft.com/forums/showthread.php?t=62987
http://www.somersoft.com/forums/showthread.php?t=62874

In fact perhaps you can link us to all the bearish threads recently where all the talk of 40% drops is? Granted this 1 thread was started on the basis of an article claiming 40% falls, but I don't personally recall seeing many others recently.

US banks lend money to people who would have never been able to afford repayments, they didn't have proper jobs. So excess houses coupled with bad lending is what caused the houses to drop in prices in US. How does that compare to Australia?

Our government increased the FHOG to bring forward demand from buyers who otherwise would not have likely been able to afford to buy property:
http://www.somersoft.com/forums/showthread.php?t=58932

Further to this parents/family have increasingly become involved with providing deposits/equity so that new buyers can participate in the market:

Gifts and use of family equity have become a more popular method of building a home loan deposit since the global financial crisis, a national survey has found.

The survey of its brokers by leading mortgage broker Loan Market found 56 per cent believed family pledges and gifts had become the fastest growing method of acquiring a deposit.

http://www.lendingcentral.com/2010/07/18/gifts-and-family-equity-grow-as-deposit-route/

I mean sure our lending is not at the poor standards that US lending was, but do you believe handouts from the government or help from parents is anymore sustainable in the long term?

 

[Deltaberry]

Delta, your digging your hole ever so deeper.

By middle ground, I mean I dont beleive the market will boom or crash.. my view is very specific and not fence sitting and once again you prove my point that most people for some absurd reason are polarised and fixated that the market will either crash or boom.

Cheers.

Haha oh gee I'm so embarrased on an internet forum. What a big hole lol.

When you have a vested interest, it's no surprise people get all fiesty when I tell them the facts and figures don't support these prices and we are severely overpriced. I'm preaching to a property forum, what do I expect?

And please don't tell us about your business credentials or development experience to validate your posts, unless you want to post direct links to them? I can lie about developing multi-billion dollar oilfields too, does that add any credibility to me in an internet forum?

 

[Deltaberry]

BayView - your situation is different because you'll be less affected. That's all. Not having a go at you. No need to get so defensive...

As I said, people here are very defensive when people make assertions like the ones I make. No surprise though. How'd you fare in 1991 followed by stagnate prices for 6-7 years?

And well said hobo-jo. To those financially attuned here (which are few from experience), why don't you try running an IRR analysis and see how you fare in 5 years with 3% capital growth (that's if you know what an IRR is)? And note I'm being generous giving you 3% growth, as opposed to people talking about 'falling' or 'stagnate' prices. Or why don't you give me a mock scenario and I'll post the results up.

I gave it to a friend the other day and he came back with -45% first year, -37% second year through to -11% 5th year. I didn't even build in capital gains tax into my model. If people that's good investment, good for them. The thing about property is for most massively negative-geared investment (like the ones in Melb would be), you create artificial returns by "paying down" your investment using your salary. But in affect you're increasing your equity base so your IRR diminishes even more. My analysis showed putting your money in the bank account would in most cases beat property unless you can achieve growth similar to the last few years of 10%+. At 3% growth rate, you're finished, let alone dips.

No need to argue, just give me your numbers and I'll run it into a model and we'll see. I'll even send you screen shots as a freebie.

 

[devo76]

Everyone has a different idea of whats ahead of us. Some base this on data, some base it on past experience. Some base it on what they personally want to see happen. Some would have a biased opinion. Those without property want a crash. Those with want a boom.While hopefully many will still make there predictions without there own portfolio swaying their decision.

So what do we call a crash ?
Is a 10% to 20% drop followed by a few years of no growth a crash? Some would say this is just part of a cycle.
How can anyone win this. No matter what the outcome there will be examples to argue. If we see massive drops then many will claim victory. If we only see modest drops then others will claim victory.
If you by at the peak and you are highly geared then sure you are in a risky position. But what % of the population fall into this group.

One things for certain is 10 to 15 years it will not matter as long as you can hang on.

 

[BayView]

BayView - your situation is different because you'll be less affected. That's all. Not having a go at you. No need to get so defensive...

Wasn't getting defensive; just explaining my experience with how property has gone up in value over the last 25 years for those who keep buying and holding.

For those who take the trading/flipping punt; timing is a lot more of a factor.

How'd you fare in 1991 followed by stagnate prices for 6-7 years?

Fine. Kept paying off the PPoR loan as that's all I had to worry about at that stage. The house still went up in value a little bit during the early to middle 90's. Why? because mine was in the lower 3rd of prices where there is more demand for buying. Houses in this price range almost never go backwards due to the level of demand and affordability for renters and buyers. Top end single family dwelling IP's...... a far more dangerous proposition.

Your sweeping statement applies to all property. But of course; there are many, many different markets. This is why I would not really ever listen to someone like yourself after those types of statements.

My analysis showed putting your money in the bank account would in most cases beat property unless you can achieve growth similar to the last few years of 10%+.

Aha! you are an armchair expert.

Just so we are comparing apples with apples, lets say a guy who is on $60k per year as his first full time job out of school. Good job, good pay for someone like this. He is a renter and has a car loan.

Now, let's say he has $300 per week to save towards his future. He can either:
a) simply put it in the Bank (ING Savings Maximiser linked to those disgusting normal Bank accounts), or
b) save it towards a deposit on an IP. He saves until he has 20% deposit on a property worth $150k (2 bed unit in a largish regional town).

All the Bank interest from the bank account and tax returns from the IP are re-invested back into the respective investment. The IP has an IO loan, and is built in 1991 - depreciation is based on the building costing $80k to build, and doesn't buy any other property in that 10 years.

Run those figures in your model over 10 years, and let us know what the nett returns are. The IP is not sold, but is valued.

By the way; I don't believe that property as a whole has only averaged 3% growth over the last 100 years. I think you'll find it is a bit more.

 

[oracle]

Wasn't getting defensive; just explaining my experience with how property has gone up in value over the last 25 years for those who keep buying and holding.

For those who take the trading/flipping punt; timing is a lot more of a factor.


Fine. Kept paying off the PPoR loan as that's all I had to worry about at that stage. The house still went up in value a little bit during the early to middle 90's. Why? because mine was in the lower 3rd of prices where there is more demand for buying. Houses in this price range almost never go backwards due to the level of demand and affordability for renters and buyers. Top end single family dwelling IP's...... a far more dangerous proposition.

Your sweeping statement applies to all property. But of course; there are many, many different markets. This is why I would not really ever listen to someone like yourself after those types of statements.


Aha! you are an armchair expert.

Just so we are comparing apples with apples, lets say a guy who is on $60k per year as his first full time job out of school. Good job, good pay for someone like this. He is a renter and has a car loan.

Now, let's say he has $300 per week to save towards his future. He can either:
a) simply put it in the Bank (ING Savings Maximiser linked to those disgusting normal Bank accounts), or
b) save it towards a deposit on an IP. He saves until he has 20% deposit on a property worth $150k (2 bed unit in a largish regional town).

All the Bank interest from the bank account and tax returns from the IP are re-invested back into the respective investment. The IP has an IO loan, and is built in 1991 - depreciation is based on the building costing $80k to build, and doesn't buy any other property in that 10 years.

Run those figures in your model over 10 years, and let us know what the nett returns are. The IP is not sold, but is valued.

By the way; I don't believe that property as a whole has only averaged 3% growth over the last 100 years. I think you'll find it is a bit more.

Deltaberry, while you are at it also put in a scenario of 3.5% rent increases per year. And make sure the hypothetical person pays tax on the income he earns from the interest in the bank at the end of each year.

Finally, would he have saved up enough deposit after all the erosion of his capital due to inflation and taxes to buy an IP 10 years later?

(PS: I have yet to meet a person who had 20% deposit but decided not to buy a house and waited 10yrs and instead put the money in the bank and after 10yrs pulled out that money and could still use it as 20% deposit on the same house after all the awesome returns they got by investing in bank accounts ) .


Cheers,
Oracle.

 

[Deltaberry]

Now, let's say he has $300 per week to save towards his future. He can either:
a) simply put it in the Bank (ING Savings Maximiser linked to those disgusting normal Bank accounts), or
b) save it towards a deposit on an IP. He saves until he has 20% deposit on a property worth $150k (2 bed unit in a largish regional town).

All the Bank interest from the bank account and tax returns from the IP are re-invested back into the respective investment. The IP has an IO loan, and is built in 1991 - depreciation is based on the building costing $80k to build, and doesn't buy any other property in that 10 years.

Run those figures in your model over 10 years, and let us know what the nett returns are. The IP is not sold, but is valued.

By the way; I don't believe that property as a whole has only averaged 3% growth over the last 100 years. I think you'll find it is a bit more.

Just to be clear (as some parameters are missing). We are trying to find the IRR of an investment with the following parameters and seeing if it beats say a term deposit IRR of 7.5%:

i) buying $150k property (+stamp duty)
ii) capital growth of 3.0% and another scenario at 3.5%
iii) minimal depreciation (seeing it's built 1991 for $80k)
iv) rent (need that, so name a figure)

Just as a side note, I'll keep it simple and not sweep the debt with the $300 savings he gets from his salary (that's if he has any which depends on whether property positively gears in the first place on 80% gearing), otherwise it changes your equity base which I'm a bit busy today to build in. I'm going to look at the property as an investment on its own. If he negatively gears I'll assume the debt is drawn down further.

 

[Deltaberry]

Ok as I'm quite busy today I just ran something quick in a bank of the envelope calc. Now before everyone tells me how successful their investment is, we're talking about someone going out and buying now.

So I buy a $150k place, put down $30k deposit and pay around $6.7k stamp duty. Equity contribution of $36.7k and debt of $120k. Capital growth of 3.5% pa and rent grows at 3.0% pa. Rent starts at $150 pw (which equates to 5.2% yield, which is high as you all know).

Interest rate schedule is pretty conservatively, peaking at around 7.75% only in 2012 and 2017. If rates hit 9.0%, god help you. In this model, you can see that even with such good yields and relatively low interest rates, you can achieve a whopping 9.8% IRR in ten years, just beating term deposit rates of 7.5% IRR on the same 36.7k you need to put in. If that doesn't make sense to you, this is what it tells me:

- If I buy this property on these numbers, I get $85k back after 10 years (pre-tax)
- If I had chucked money into bank and can get 7.5% term deposit rates for 10 years, I can get 75k (pre-tax)

This property wins, by a bit. Taxes are too hard to build in because what rate your interest is taxed at depends on your income (ie marginal tax bracket). If I'm a bludget I'd probably pay no tax on my bank interest. In contrast the property sale is realised in the same year, so you're bound to hit even if you're a dole bludger.

So all this has exclued many other costs including random repairs, council rates, land taxes, vacancies. Interest rates are very good as I said. For the people buying in Carlton getting 3.2% yield, what happens to the numbers? Much worse. I've assumed 3.5% cpt growth, which most would now challenge as low and not justified yadayadaya. Well what if it falls 10% in one year and 5% in the next, then resumes the 3.5% growth for 8 years? It makes it an absolutely abysmal investment. Each to his own. I'm as much an armchair investor as an active investor, but numbers are numbers.

oracle - I didn't read your post that closely but I'm guessing you'er saying you've never seen someone get back into the market if they missed out. Reason is we've experienced 8-10% growth pa. Can we? Is that sutainable? What if it's 3% growth? I can get back in easily. Also people don't get back in because it's not like they invest what would have otherwise been a deposit into a bank account. They spend it. That's more a lifestyle issue than an investment choice.

 

[skater]

So I buy a $150k place, put down $30k deposit and pay around $6.7k stamp duty. Equity contribution of $36.7k and debt of $120k. Capital growth of 3.5% pa and rent grows at 3.0% pa. Rent starts at $150 pw (which equates to 5.2% yield, which is high as you all know).

NO! I don't know that rent is high using your example. I would say it is decidedly low as I would not touch anything with a 5% yeild. I bought two not long ago. One for $150k renting @ $230pw and the other for $155k renting @ $220pw. This is outer Sydney.

 

[BayView]

Rent starts at $150 pw (which equates to 5.2% yield, which is high as you all know).

See, now this is where you let yourself come undone straight away DB.

5.2% yield is very poor (especially at the cheaper end of the price range), and only for those investors who are of a myopic view who only want to buy in major cities, inner-city or maybe middle ring inner-city.

How's this for just one example of one of mine:

Now, please understand that this is not a brag session; it's purely a real life illustration of what can be done, and what you seemingly have yet to be part of based on your statements and figures..

I did it over the internet, sight unseen, not in a major city (larger regional), and did no value add or any reno.

Purchase price was $105k in 2003, for a modest 2 x 1 unit with a courtyayrd and a SLUG, with renter in place at $180 p/w. Built in 1991, so depreciation is nice.

Current value is approx $220k, and rent is at $280 p/w. We could get more, but the place is in need of some tlc according to the PM - due for some new carpet and a fresh paint.

So, based on my purchase price (including purchase costs of approx 5%) of $110,250 , my rent return is now 13.2%. That's not including the pos cashflow after tax from the on-paper deductions.

5.2% indeed.

This is why everyone is giving you a pounding here, mate.

 

[skater]

See, now this is where you let yourself come undone straight away DB.

Exactly right! There's three examples for you. Two of mine and one of Bayview's. To say that 5.2% is a high yeild shows just how naive you are.

 

[BayView]

And further to all the comments, DB; here's some fatherly advice for you for this forum;

Instead of coming on here and sprouting chicken little garbage, why not come on here and ask a few people; "how can I do it too?"

From my experience here, anyone who asks....gets.

 

[Deltaberry]

Rather than look at the numbers for what they are, this is what you come back with...? Plenty of people buy at these yields and lower and indeed most metropolitan auctions sell far below these yields. That's why the market is overvalued and not sustainable because the overwhelming majority of auctions (by value) yield even less than my simulation exercise.

Also please don't use a 2003 purchase price to calculate your yield based on current rent. Why don't you use something purchased in 1998 and tell me what it's yielding now while you're at it?

What I love about forums is that I never talk about what I own or what I'm doing, because there're always people out there (including on this forum) doing much better than me, much more than me. So if you're going to talk about a $220k property yielding 6.3% from which I have a lot to learn from, then with all due respect, maybe think again?

skater - what examples did you post?

By the way, I helped you calculate your current yield based on your $280 rent and $220k market value. Chuck on stamp duty it does around 6.3%. Just in case you didn't realise since I know you're all so attuned with manipulating numbers (ie 2010 rent / 2003 price)

 

[Deltaberry]

I thought I'll be nice and try running a $220k asset at $280 rent pw despite our differences. Not too shabby. 13.8% IRR over 10 years.

Of course, I didn't put in any contingency money for repairs / maintenance, didn't tax your rent, didn't assume any vacancies, didn't add council rates or land tax. So consider it your upside. A more realistic return is around 10%.

Of course I kept the same low interest rates (ie they peak at 7.5%). Sending rates up so that it makes around 8.5% for a few years and comes back down to 7.5% or so sends your IRR back down to around 12.2%, giving a realistic return of around 9%. And as you'd expect, as rates go up and your IRR comes down, my money in the term deposits yield more

 

[skater]

skater - what examples did you post?

NO! I don't know that rent is high using your example. I would say it is decidedly low as I would not touch anything with a 5% yeild. I bought two not long ago. One for $150k renting @ $230pw and the other for $155k renting @ $220pw. This is outer Sydney.

You missed this post? Both bought 2010.

 

[Dazz]

I could give you some numbers Deltaberry for 2010, but you'd come back with 3 or 4 excuses as to why it wasn't relevant or unsuitable for you or the average Joe in the street, or was too risky, or was too expensive, or....


There are some elderly folk who have done extremely well in their investing whom I have had the privilege to meet, and they can't even spell IRR, nor drive a computer and have never been on the internet.


Analysing and modelling is all very well, most economists and University professors and Lecturers do heaps of that stuff, and could probably run rings around you in that dept. Their models are able to take tax into account. None of them are wealthy, certainly none that I have ever met.

 

[skater]

I could give you some numbers Deltaberry for 2010, but you'd come back with 3 or 4 excuses as to why it wasn't relevant or unsuitable for you or the average Joe in the street, or was too risky, or was too expensive, or....

Which is why I gave him my examples. They are something that anybody could purchase. Easily fundable no matter your income or risk factor. In Sydney, admittedly not inner city, but not in some one horse town that no-one has ever heard of. Two different areas, one being West Sydney, walking distance to rail with a high demand, the other South West, walking distance to rail and a large shopping centre, again with a high demand.

 

[steveadl]

Skater, perhaps if you prefer I could interest you in this lovely brick wall to bang your head against instead.

 

[skater]

Skater, perhaps if you prefer I could interest you in this lovely brick wall to bang your head against instead.

LOL!