Property Crash?

[Garry K]

Hi all.

I am always interested when people use Japan as some sort of yardstick when mentioning deflation in Australia.

My limited knowledge tells me it is not a relevant comparison, because:

Japan has a very closed financial/banking system ie it is difficult to get a true picture of their solvency (many bad debts on their books).

Present PM came in with a message to deal with the problems, but, again, this one has turned from a tiger to a kitten - due to pressure applied.

They are very reluctant to "bite the bullet" on the hard decisions they must take ie write off bad debts etc

They do not like unemployment, and companies tend to over employ, although this is changing.

The Govt. have spent billions on infrastructure to create activity and jobs, eg build bridges. But this is only a short term solution, once the bridge is built, that's the end of the activity.

There is a high degree of self interest in the Govt, with many "politicians" also being involved in the companies that benefit from govt. contracts.

I know we are not perfect, but I believe we have a more open and accountable financial system (Govt. and Corporate), which makes us more likely to face up to issues. We still get hurt at times, and greed takes over, but generally we get back on track.

Any comments appreciated.


Geekay.

 

[Macca]

Hi Geekay,

I can't get "hsdent.com" to open, could some one put the full address up please.

Fair comment on Japan, but it seems to me that all investing runs in cycles. With the papers full of cautious comments I believe a lot of investors will back off on real estate. This should lead to a cooling off, and a bit of sanity being restored. Hopefully we can enter a period of steady growth, where we have the time and opportunity to do good DD without missing the property.

 

[Garry K]

Hi Macca

Yes, the dreaded cycle. They are hard to escape, and every time we say it won't happen again, it does.

HS Dent is opening for me at

http://www.hsdent.com/

Try again.

Geekay

 

[zamaz]

Please excuse if this point has already been made (I read the whole thread but got a bit lost at points - my ignorance not your writing ) but it seems to me that there is no doubt that the situation will not continue as it is, becasues if CG is 10% and inflation about 3%, on average houses go up 10% and on average wages go up about 3% - sooner or later no-one will be able to afford a house!
Was going to do the sums but not real good with interest calculations, and didn't know any short cuts.......anyway I hope you get my point!

 

[always_learning]

I think this issue is that existing housing stock has risen on average 10%p/a ( some 5% some 15% ).

This is existing housing stock, I would propose that new housing stock is being developed all the time, new housing stock tends to be sold to Mr and Mrs average income earning.

So it is possible for existing stock to rise 10%pa above inflation if new stock is brought to market at a price consistent with what Mr and Mrs average can afford.

Also the 10%p/a average increase is influenced upwards by people extending and improving on there existing houses.

 

[L Bernham]

John wrote
Sorry for being a pessimist but its hard to feel bullish about buying property right now. I suspect people doing so will be setting themselves up for 10 years of very ordinary returns

John - I think you have the right attitude. Any real investor wouldnt ignore the negative aspects or the risks. Something I wish I had taken heed of 3 years ago before the tech stock crash. One very experienced and wealthy investor told me one very important thing, and this is to never fall in love with a stock because you will ignore all negative comments but only listen to the postive. I did exactly that and lost more than I should have.
I even thought I was doing the right thing by listening to those saying we were in bubble territory, but my bias forced me to find reasons why it "would be different in my case".
With property it seems to be the "not in my suburb, not in my street" syndrome. Or the case of - no-one else knows the best places to buy but I do cos I went to a seminar or read "so and sos" book etc.

The fact is that fundamentals usually win in the end and there is no reason to see why Australia should be any different. I also think that when there is a new property "millionaire" being shown on TV every night its time to get out.
I once read that one of the best ways of picking a bubble is listening to what people are talking about in coffee shops and pubs etc. When you hear that you can usually guess that what they are talking about is now very expensive.

Interesting to note that many of the countries that we are receiving our new arrivals from are also going through property booms ie UK, China. No doubt they have their own reasons to justify the prices there. China probably says they are justified because its the worlds most populated country and the UK would say its the lack of space.

As for Japan, I wouldnt suggest that we could be compared as we are very different economies. I only use the argument that Japan prices lost 80-90% of their value to say that it is POSSIBLE that property prices CAN fall, not that they will. Its dangerous to say that prices dropped in Japan but that cant happen here because we are too different. Market forces all speak the same language.

Cheers
L Bernham

 

[abcdiamond]

The way I am looking at it is:
SHORT TERM
Prices will go up and
Prices will go down.

LONG TERM
Prices will go up (please GOD, do not prove me wrong!)

In the meantime, as long as we have sufficient income to pay the mortgage, then everything will come out OK in the end.

The question i am now pondering is to fix the interest rates for 5 yrs at 6.09% or hope we follow the rest of the western world (USA & UK) and the variable rates drop to between 1-3%

 

[L Bernham]

thats right - long term prices will go up.

It depends how long term you are talking about.

In the Florida RE crash in the 1920's, all people talked about was how prices can only go up, even if there is a correction thats all it will be.

This was a time when Fl had a population explosion (Due to the invention of the car amongst other things) the likes of which no state in Australia will ever see.
The funny thing is the population growth forecasts were correct, if not a little underestimated. Did this stop a crash from happening - No. It wasnt till around the 1950s that they recovered to the level they had been in 1925.

when everyone bases their investment decision on beliefs that prices can only go up, they do. It becomes self fulfilling, more people believe it and then it takes something major to wreck that belief until the next generation comes along and starts all over again.
Playing for capital gain (esp after a boom) is a dangerous game.
Invest for "after expenses" rental return and if you make a capital gain see it as a bonus. If you cant find anyhting with a decent rental return - chances are you've missed the boat. Find another investment class to make money. (there are plenty)

Good luck

 

[Jean]

L Bernham has got it right: "Playing for capital gain (esp after a boom) is a dangerous game. Invest for "after expenses" rental return and if you make a capital gain see it as a bonus."

A year ago I started selling the worst properties held, although they were positively geared after 10 years of growth. At the sale prices obtained, the buyers would only gross 4% (no vacancy or maintenance). All needed refurbishment and some major maintenance items. I know the local market and would not have bought at those prices.

Rental housing is a risky business and in the suburbs I monitor there have been quite complex changes flowing through to affect (rental) demand that are not yet understood by myself or by other local stakeholders. Bigger issues such as contract work, delayed fertility, higher education costs, young people remaining at home longer, etc may have changed some of the fundamentals. Also, overhead costs have grown exponentially, for instance compliance with changing rental regulation, local govt and tax requirements.

From attendance at meetings of property investors and property managers it is obvious that many investors in IPs find their properties are a substantial drain on their resources and overly affect their quality of life. Many severely compromise themselves in the hope of a future windfall. IMHO, many grossly UNDERESTIMATE maintenance costs and rental vacancy and OVERESTIMATE the joys (?) of negative gearing.

Some properties are good business, however at present such properties are very few and far between. Plenty of punters around though.

 

[L Bernham]

You must have been in the business a while Jean.

You seem to understand how it works better most, myself included.
Good post

 

[NIF]

I have an open mind on this topic. But going off recent performance, the only forecasters that have had any accuracy in picking the market correctly over the past 4 years have been Residex. Almost all others, including regulars on this forum, were forecasting substantial falls.

Residex discussed the possibility of a crash in detail in their last quarterly report & their forecast is that it isn’t going to happen in Sydney houses over the next few years.

 

[abcdiamond]

NIF
What did Residex say about Brisbane area ?

 

[MF35]

Seems to me alot of people spend alot of time and effort trying to predict what the market will do. I'd like to know how this has benefited these people in the past? And when you're factoring in how you've saved or made money buy buying or selling at the right time remember to factor in all the times you didn't get it right and lost money or missed opportunities. Like those who have not been investing for the last 2 or 3 years because the bubble has been going to "burst". It's as much a loss if you don't buy and your predictions are wrong (missed opportunity) as it is if you do buy and property drops.

Isn't this as much, if not more, like gambling as relying on your own predictions of capital gains is? Except history is more in favour of long term capital gains than people being able to precisely pick what the market will do.

I've heard a couple of examples given recently of bad long term drops in property value. Japan and somehere in the USA?. Are these the only two in recent history? In the whole world? I bet there are a few others somewhere no doubt. But how would this compare to alternate investment crashes. Like the stock market. I bet you would find many more examples of diving value and investments that dissappear completely (sometimes almost over night).

My interest is Australian Property and given Australia is one of the most desireable places in the world to live I think it's one of the safest bets going around long term.

I agree that people shouldn't think property has "no risk" and shouldn't think it is "easy" and "you can't go wrong". But given the options I personally don't find anything else more appealing.

I doubt very much there is anyone around who has picked every turn of the property market over a long period. I'd go further and say even those who are good at it will still get it wrong at least some of the time. People usually only tell you about their winning bets. So by the time you minus the losses (real or opportunity) from the benefits when they get it right how much are they in front of the person who regularly invests in the best deals that they can find at the time, in the circumstances? Not much if any would be my guess. And what if they get it wrong more than right?

I don't advocate one investment strategy (ie - neg gearing or positive) over the other. I just think that the best deal you can do now or in the near future is better than the great deal you might do in the future if your predictions turn out to be right.

Just my thoughts.

MF

 

[abcdiamond]

A very interesting reply MF35, it made me sit back and think.

I've made a lot of good property investments in the past, PPOR, and always bought and sold at the right time, and in the rght area, but all done without thinking of it as a business.

Now I am thinking like a business man in the property market, and maybe I am thinking too much. Trying to find the BEST deal, but with less thought and effort I will probably still do OK,
but then again... the BEST deal is always tempting to find.

 

[MF35]

abcdiamond,

I don't see any problem with doing your DD and looking for the best deal you can get at the time. Some people may not want to invest as much time and effort into the equation and purchase something good, but not necessarily great.

The point I was making previously is that I think as a general rule you're better to do one of the above sooner rather than later, especially if later is reliant on predictions of what the market will do in the future. If it doesn't happen what do you do? If your prediction comes true (or close to it) but it takes 10 years for it to happen (so you are out on the timing) and you've been waiting what have you lost in terms of opportunities to make money or build equity in the mean time. The only prediction I'm prepared to bet on is that property in Australia, especially coastal property and property close to major cities, will increase in value on average over the medium to long term (say 10 - 30 years).

MF

 

[L Bernham]

The trick,when investing in anything is to calculate Expected Return.
Five years ago property prices were not at a level that they could possibly drop by much, therefore the downside was limited enough for the expected return to be positive.

Now, there is a potential downside of 30-50% (look at any other property boom in history that has made similar 5 year gains and look at the years that followed ie SIngapore, Japan, Hongkong, Florida, San Franscisco, UK, Australia in the 30's and many more.
Whether they fall by that amount remains to be seen but one would be foolish to ignore the possibility in calculating expected return. Even with a potential upside of 20% growth this still leaves a negative total expected return.

Naturally, everyone will come to different conclusions.
If you say there is no chance of a fall in prices, a 50% chance of flat growth and a 50% chance of 30%+ growth, I would say go nuts, buy for all its worth!
This is what makes the market. The sellers are going to need someone to buy when the downturn really starts. A rise in prices from here will see the average FHB's well and truly unable to afford and then you have to start wondering who will be doing the buying? Investors? Not likely, while rental returns are so low.

 

[Bill.L]

Hi all,

Good post MF. But we all make predictions by our very actions. Property has been very good to me over a fairly long period, but I don't discount that that could change. I just have to be prepared if it does.
I like to look at/make predictions in regard to what is possible in the near future(1 to 5 years) and make my bets(investments) accordingly. I ask myself how I will be placed if a variety of scenarios unfold. Because the gambit of probabilities is wide, my investments tends to be conservative to allow for various outcomes.

Where people get themselves into the most trouble with any investment class, is not the jumping on the bandwagon too late, but overcommitting themselves so that any little hiccup wipes them out. A made scramble into property investment by any means now, could lead to trouble if there is such a hiccup.
Slow accumulation of property, that can easily be afforded, over the long term, is a strategy that has worked well, and I see no reason why that this should not continue.

bye

 

[NIF]

Sorry abcdiamond I only get Residex’s NSW report so don’t know what they forecast for Brisbane.

I totally agree MF35. Trying to forecast the market I renigged on buying another Sydney IP in late 2000/early 2001 & missed out on spectacular growth. Then with every-one saying the market had peaked I sold an IP in late 2002. Its gone up about 20% since then.