Property prices? Recession looming?

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From: Peter Davidson


With a recession looming and confidence down, what will happen to property prices. I'm from Melbourne, Eastern suburbs. The way I see it, over the last few months, property prices have increased in the Eastern suburbs and don't look like stopping. Has anybody been through this cycle before? What generally happens to prices in a recession. Do they go up, ie, people pull money out of shares and put into property, or down, people hold onto their money for a rainy day? Or do prices just sit where they are. I supposed there would be more opportunities though? Thoughts anybody?
 
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Reply: 1
From: GoAnna !


Hi Peter

I am speaking from the perspective of Melbourne only and after experiencing the last cycle only. Others of course have far more experience (and a fuller economic understanding?).

In the last boom a lot of money was moved from shares into property after the big crash. So properties moved a lot in a short time.

When the bubble burst due to businesses and jobs disappearing under the pressure of high interest rates and share losses some properties lost a lot of value almost immediately (usually higher priced bought at the end of the bubble)while others remained almost steady. A number of property investors left the property market (often due to poor advice - I know because I was advised to sell and am so glad i didn't - I should have been buying). Due to the shortage of rental properties rents rose.

This time some things are different. Interest rates are low (not around 17%). The Victorian economy is in good shape (a long way from the rust belt). I am sure that there will be some good deals to be had but there are probably opportunities now that can be locked in with low interest rates as well. Buy now? Save your pennies? All depends on the deal. The numbers should tell you.

In general in a recession there is a shortage of money. Lots of things are discounted so if you are in a position to pick up some discounted growth properties you would then be wonderfully positioned for the next growth period.

I look forward to some healthy debate!!

Anna
 
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Reply: 1.1
From: Gee Cee Cee


Hi Anna
I have been saying virtually the same for a short while now.

Although areas are at different times in the boom bust cycle.

It is impossible to know every area.

But if you know your area and perhaps another area and study it constantly you have a lot better chance of being successful.
Be Careful not to get in with the crowd & follow the sheep.

In 1 to 3 yrs when the boom is over there will always be bargains around. Although if you look back at property not much happened between 1991 and 1999.

So you may have to hold LONG TERM and wait for the next upward cycle.

As well as stories of IF ONLY I HAD.


Gee Cee

Just me ranting raving again.
(That's Raving NOT RAGING) !!!
 
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Reply: 1.2
From: Pete N


hi pete

recession or no recession, people will always need somewhere to live. so theoritically, if people stop buying, then there wil be an increase in rental demand. demand is the main factor that increases property prices so in the recesion of the early 90's houses in suburbs such as new farm performed well because of the demand for that location. anyway, what looming recession? negative sentiment is a major contribution to the poor performab\nce of an economy im told.


cheers

pete
 
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Reply: 2
From: Marshall Brentnall


Hi Peter

Peter N has a very valid point, people will always need a home - and regardless of the economic climate there are always opportunities.

As the saying goes when the going gets tough the tough get rich.....:)

Marshall
 
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Reply: 2.1
From: Jeanette .


I'm a bit worried about the announcement this morning that the FHOG is going to be increased to 14K. I'm worried that there will be a lot of people now able to move out of rental accommodation into buying their homes. I am relying on rent to pay my loans and worried about possible vacancies out of this news. What do others think?
 
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Reply: 2.1.1
From: GoAnna !


Do you have more information? Where was it announced?

Anna

PS Each coin has a flip side. Other people will be worried about the talk of a recession. They may put off buying due to concern about the stability of their employment.

Rolf, can you get a home loan if you have 14k grant and no other savings?
 
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Reply: 2.1.1.1.1
From: Gee Cee Cee


I do not know where you are but the only time I have seen property easier to rent was back in the mid 80's.
That was when the Govt dropped Neg Gearing.

At present I have had old tenants drive out &
the new tenants drive in.
Gee Cee
 
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Reply: 2.1.2
From: Terry Avery


Hi Jeanette,

Yes the increase in FHOG is worrying in that SOME tenants will be able to
buy their own home. However, if they are like my son, most young people are
living at home, saving for a deposit, and not renting anyway so I don't see
huge numbers of tenants vacating. The government is trying to apply a
jumpstart to a comatose building industry. They are in the emergency ward
yelling CLEAR trying to revive one of the main drivers of the economy,
housing. The increase is only a short term measure, I haven't read the full
details yet but even if a number of people qualify for the FHOG they still
have to meet bank lending requirements.

Don't panic, take a deep breath and try to analyse what type of tenants do
you have? Do they like your IP so much they want to stay and buy it from
you? Are they in a financial position to buy a house? Think it through first
and don't react to every piece of news, we are not day trading shares here.
 
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Reply: 2.1.2.1
From: Yuch .


Guys,

Don't panic and read carefully!!

My understanding is FHOG still remains $7000 but for those first home owners who wish to build their own home, the grant is $14,000.

Regards
yuchun
 
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Reply: 2.1.2.1.1
From: GoAnna !


People rent for many reasons. Inability to save for a deposit is only one. Over the years most of my tenants have been able to afford to buy their own homes. None chose to. One wanted to put his money into his business. One wanted to buy an IP. One liked the freedom of renting. The reasons are endless. Will renters in inner suburbs leave their rented apartments to move to a new house in the outer suburbs? Very few.

Keep in mind that the 7K grant has been in place since 1 July 2000 and the takeup has been less than the government hoped for. This is probably why they have enough money in the kitty to double it to 14k for new homes.

And let us not forget that so much of our recent discussions have been about people lacking the courage to go out and buy that first (or 2nd or 3rd) IP. What makes you think that first home buyers wouldn't be just as scared. Just because you have the finance doesn't mean you are emotionally ready to buy.
 
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Reply: 2.1.1.2
From: Justin Odgers


my opinion people are scared of commitment and see renting as a monthly proposal, not a long term project. people who were going to buy maybe forced to take advantage of grant and buy sooner but plenty of people will still be prepared to rent for (lifestyle) choices, my advice don't panic wait until tenant vacates give agent a chance to re-let and assess when needed.but try to hold the gains are too great.
 
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Reply: 3
From: Sim' Hampel


Umm... what makes you think a recession is looming ?

 
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Reply: 3.1.1
From: Khurram Saeed


i dont think there is gong to be any recesssion...money is the cheapest it has been for years....more and more people are buying houses, auction results are going through the roof...and that is with interest going up 50 basis points...i reckon keep an eye on the auction results (Demand side) and when they start coming down to th 60% level...then you know we are about to get some nice and juicy deals...

I think the people who feel the brunt of interest rates will be firstly the first home owners, who have just squeezed in with the $14K grant...and $100-150/month extra might hurt them...and the second group is those who are buying overprices properties at rdicoulus 1-2% rental return...i know people who bought in Docklands...(i personally would never buy there), who cant get anyone to rent their place, and the ppl who are renting only are getting 2% rental return....how long can they afford to keep these properties...not for long...

Funny thing is the same people who were saying recession is coming about a year ago, will be saying it a year from now...so dont get into the herd mentality...go back to basics....if you can get 5-6% rental...buy as many as your bank lets u.
Khurram
P.S) I am only saying what i am doing, it doesnt mean i am right.
 
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Reply: 3.1.1.1
From: Michael Yardney


Yes Peter I have been through it before, and in the Melbourne eastern Suburbs like you.
I've invested and traded through 3 property cycles.
You are wise to ask for the opinion of someone who has been through it as most of the investors I see have not owned an investment property through a 7 to 10 year cycle.
Just like so many novice investors got burned in the share market crashes, by believing that prices always go up, many clever investors lost money and even their houses in the real estate slumps of the early 90's, middle 80's and early 70's.
Sorry my memory and experience doesn't go back further, but my reading of history does.
Every time the crowd says the cycle won’t sop….that’s about when it does.
All the signs are there again and the professionals have been out of the market for a while. Just like they will be back in again before the crowd and push the prices up before the crowd knows it.
So what’s in store?
I give my opinion in our newsletter, which went out this afternoon to subscribers (see meeting point for free subscription details), but in short:
Some areas of the market will perform very poorly in Melbourne over the next few years. Apartments and houses in the outer suburbs.
Apartments because too many investors have bought off the plan on deposit bonds and can’t settle. My evidence of this is private communication form some very nervous mortgage brokers.
In the outer suburbs, the market has hit its affordability barrier, with young families not able to afford more and they won’t push up the prices.
There are opportunities still in the inner suburban home market where affordibility hasn’t pushed the limits yet.
So I see flat prices with minimal growth for a few years, with the resumption of price increases following that.
Do house prices drop- yes they do. Ask anyone who owned property 10 years ago.
DO house prices remain stagnant for years? Yes they do look at the graphs of capital growth in the early 90’s and early 80’s.
Is property still a great investment YES it is, as long as you know what you are doing.
Michael Yardney
Metropole Properties
 
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Reply: 3.1.1.1.1
From: Always Learning


Michael you say:
"Every time the crowd says the cycle won't stop ... that's about when it does."

What about this quote from PK property buyers in Sydney
<p>

<table valign="center" width="70%" border="0" cellspacing="0" cellpadding="1" bgcolor="lightgrey">
<tr>
<td>
<h4>Interest rate rise did not slow market</h4>
<p>

The reserve bank interest rate rise of .25 % has had little affect on the booming real estate market. The main problem has been a lack of good stock in the marketplace, which has created a huge backlog of buyers. With little stock out there and huge demand from buyers, the market has a lot more growth in it yet.
The government shouldn't be looking at rising interest rates dramatically, because it's the housing market that is keeping this economy’s head above water at present.
There are a lot of people out there that are not reliant upon the building industry for their income and believe me, they are not jumping for joy at how their businesses are traveling at present.
I have been in real estate when interest rates were 19% and the market was still strong. So even if interest rates go up 1% in the next twelve months it will only be putting a strain on the first home buyers rather than the over $750,000 buyer’s.
There are so many people out there that have missed out over the past twelve months that they are now determined to buy no matter what. So it's this strength in buyers that will keep the market strong, accompanied by a short supply of good property on the market.

<h4>"Handy Tip!"</h4>
<p>Hot Tip: The market is still moving and it has a long way to go yet, so if you see something buy it

</tr>
</td>
</table>
<p>
Does that quote " so if you see something buy it" fit with your observation about the end of the cycle being soon?
<p>
 
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Reply: 3.1.1.1.1.1
From: Michael Yardney


Always learning
Thanks for the question.
Firstly I was heavily invested when interest rates were 19% as the quote says and the market was not strong.
People were not buying and if you look at capital growth which is what many investors were after, it was often negative after inflation of 8 -10%. What this means is that even if properties went up 7% per annum you were behind, because the cost of everything else was going up by more.
I'm not suggesting this will happen this time, I'm suggesting price growth will moderate.
I also think you should look at who is writing the comment. I also look at PK's web site to see their comments. they are buyers agents with a vested interest. How many investment properties do they own?
How many did they buy in the last slump?
I did not get where I am in the property industry (we have 24 development projects on the go at present) by being pessimistic.
I survived the last 30 years by being realistic.
I'm not trying to talk down the market, or discourage investors. I'm just saying a large part of successful property investment is knowing history.
I just had an agent tell me how great the market is and how prices are going to rise further this year. (he was trying to sell me a site) It was fascinating to now that he was an ex developer who went broke in the last cycle and still hasn't learned the lessons.
Michael Yardney
Metropole Properties
 
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Reply: 3.1.1.1.1.1.1
From: Always Learning


Michael,

<p>

Thanks for your reply, whilst I am old enough to remember the last boom (uni student), I was however lucky enough to enter the market when things in Melb were at bottom (end '91 then again '96), so I have been more than happy with the capital gains made.

<p>

As an expat, not living in Australia, to be honest I was very surprised at my last trip about current market sentiment, it was like property buyers where taking "careless happy" pills. This raised my memories of 12 years ago at the peak of the market when property buyers seemed to be taking the very same pills.

<p>

So anyway I have a few questions:

<ol>

<li>

What differences do you see (apart from the interest rates and inflation rates) between this cycle and the last cycle? What if anything does this mean for the IP investors strategy?

<li>Will you be recommending to your clients any change of strategy? I remember late last year (correct me if I am wrong) your recommended a "wait and see" policy due to inflated prices and general market uncertainty.

<li>If the forecast is for lower capital gains and lower prices in some market segments then have you shifted downward your estimates of final valuations and thus viability levels upcoming projects? Will you wont pay as much now for a prospective site as you would have last year?

<li>"If" there is a panic in the OTP deposit bond "HK" believers/investors, at what price point would you say some of these high rise developments make good long term investment sense (if my plan is to live off rental returns in 10 years)?

<li> You suggest that inner city housing has not reached it affordability limits. This is a very interesting statement to me, I currently believe that such things are driven by pure supply and demand economics. I agree with you that the bulk of outer suburb first home owners/young families have a basic limit or "wall" of affordability and simply cannot afford to pay more. Whereas in the chic inner city market, there is a much broader range of incomes and equity levels; as such given any desirable property a buyer who's income is only 100K is pushed out at auction by someone on 200K/year, who is pushed out by the stock broker on 1M/year who is pushed out by the dermatologist etc. ie. there is no "wall" just various people who can either pay more (ante up) for that chic inner city pad or fold and look for something cheaper maybe in a location not as desirable. How do you view the inner city market?

</ol>
 
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