Property risk highest in a long time

[kum yin lau]

Hi, there's a property on Glen Osmond rd asking price at 8% net yield. It's commercial of course with 4 tenancies.Just over a million $

Now if I were my sister or my niece with PPOR worth 1.4M owing nothing, I'd go to the bank & borrow 1.1M fixed for 3 years @ 4.95%

Sigh! I'm not my sister & unfortunately, my PPOR is at 80%LVR so nothing doing there.

I've fixed for 2 years at 4.99 & am travelling quite nicely at the moment, even in sad old SA

KY

 

[Deltaberry]

Deltaberry, if I recall right you said you purchased in the area last year, prior to the "boom".

Given the dismal yields the Melbourne market presents (at a city level, not saying individual deals can't achieve better than the average), I assume you purchased with the intent to speculate on capital growth? What was the yield on your property at time of purchase? What factors did you consider when purchasing inner Melbourne (e.g. local market indicators that suggested price rise was imminent)? What areas would you say are likely to "boom" over the next 12-24 months?

I purchased because I felt the sites were undervalued. They were prime sites so yes, in the long-run I am banking on capital growth. In the short-term, I sensed they were undervalued, just that the capital growth appeared quicker than I imagined.

Yields were enough to positively gear at 100% leverage.

Factors I looked at?
- Market activity (weak)
- Optionality (high - I could develop one in to a hotel/offices in CBD with spectacular views, and change the other to a multi-level facility with stores, beer gardens etc. In fact I just got a proposal from a developer for the second site [I haven't even settled yet on this site] to build 16 floors of apartments, which I turned down, because me and my partner [my uni friend] don't want the fuss. This also addresses your points about yield)
- Price: cheap on per sqm basis compared with some 2010 prices achieved and compared with any respectable city overseas (yes including US ones where I also looked extensively)
- Yields: high enough to justify entry, with optionality to increase significantly
- Location: prime. Last two purchases. One is in the middle of CBD across one of the two most important commercial developments in the foreseeable future. The other is the most serene location you'll probably find in CBD.
- Macro factors. Rates were falling, savings were up, consumption was down. Meaning people are cashed up. People were chasing yields (which they did, look at TLS and ANZ). Where does money go after TLS falls to 5% yield? Back to blue chip properties.
- Other macroeconomic factors: inbound investment in to real estate, migration, student market etc all looked positive
- What were the smart people doing around me? Buying sites.
- What were my "ordinary" friends around me doing? Buying their first house
- Lastly, instinct - given all the factors above, something told me the market was going to move, or at least what I was looking at was going to.

Not sure where the next growth phase is. Not enough gut feel about the rest of the market.

 

[The Fence]

You would not want to be the canary in the Australian real estate market mineshaft these days because every paper you read has a different story.

And it's like the papers really know whats about to happen next and can be trusted to keep you posted and safe.

 

[Ausprop]

Hi, there's a property on Glen Osmond rd asking price at 8% net yield. It's commercial of course with 4 tenancies.Just over a million $

Now if I were my sister or my niece with PPOR worth 1.4M owing nothing, I'd go to the bank & borrow 1.1M fixed for 3 years @ 4.95%

Sigh! I'm not my sister & unfortunately, my PPOR is at 80%LVR so nothing doing there.

I've fixed for 2 years at 4.99 & am travelling quite nicely at the moment, even in sad old SA

KY

Agreed, money is stupidly cheap. the cost of it is barely more than inflation

 

[tambourineman]

I think you mean almost double the inflation rate ( the Rba rate is a meaningless number) retail rates are about 5 percent.

House price growth is less or equal to inflation.

Interesting also to see the GDP numbers out annual growth if 2.6 percent in the midst if a mining investment "boom" - what effect do you think halving (atleast) of mining investment over the years to 2016 will have on the economy, employment and house prices ?

 

[Aaron Sice]

I think you mean almost double the inflation rate ( the Rba rate is a meaningless number) retail rates are about 5 percent.

House price growth is less or equal to inflation.

Interesting also to see the GDP numbers out annual growth if 2.6 percent in the midst if a mining investment "boom" - what effect do you think halving (atleast) of mining investment over the years to 2016 will have on the economy, employment and house prices ?

no, pretty sure he meant "barely more than the inflation rate", because that's what he typed.

"official rates" versus real rates are another thing entirely. a cup of coffee at my local went up 10% last week. my favourite lunch at my local lunch bar went up 15%. apples at woolies just went up 112%, even tought it's apple season.

 

[Sidney]

I think you mean almost double the inflation rate ( the Rba rate is a meaningless number) retail rates are about 5 percent.

House price growth is less or equal to inflation.

House prices need only stay level with inflation to make them a good option for cashed up investors. With a rental return of say 4-5 % that's the equivalent of getting 6 or 7 % in the bank. Less costs of upkeep of course, but still not bad. Any capital gain after that is a bonus. And if prices remain flat, ie don't go up with inflation, well it's still much the same as having had your money in the bank, so no great loss.

It's a different story if you're borrowing 80% or more of the purchase price, though. If you're going to leverage up on a yield basis then you need at least an 8% return to make it worthwhile, like kum yin is saying. Otherwise the only benefit to holding is in the hope of a capital gain. But even then, if you can get a return equal to your interest, you're not losing anything, and presumably one day prices will rise again to make it all worthwhile.

As I see it, the risks property are 1. prices dropping. But if your in it for the long term, it's no big deal because eventually they'll get back to where they were, and in the meantime it's only a paper loss.
2. Interest rates rising. But that's only going to happen if inflation kicks in, and if inflation kicks in there will be upward pressure on rents, so again it's nothing to sweat about.
3. The economy turning bad, unemployment rising and tenants no longer able to pay premium rents. But if this happens interest rates will be as good as zero in real terms (and could even possibly be negative) so holding property is not going to be an expensive exercise, and with the housing shortage in places like Sydney you're always going to have someone to rent the place - at least for enough to cover the meager interest you'll have to pay.

The risks in buying property might be rising, but it's still one of the safest forms of investment, provided you buy in the right place, and you're not in over your head, mortgaged up to your wazoo. And if your in over your head, then it's not property that's the risk, it's you.

 

[Deltaberry]

Let's use your numbers as example.

Assumptions (I can see some people stopping reading by now):
Net Yield (fo argument's sake): 6%
Cost of Debt: 4.8% (at Westpac)

Let's use some figures to make it easy for everyone (if you're even reading after seeing numbers).
Cost of Property: $1.0m
Leverage: 80%
Debt: $800k
Equity Required: $250k (including stamp duty)

Profit/Loss Each Year (I'm sure only half the people are reading by now):
Earnings Before Interest and Tax: $60.0k
Interest: $38.4k
Profit Before Tax: $21.6k

What does that mean for you (I've probably lost 90% the forum at this point):
Return on Equity = $21.6k/$250k = 8.65%

So by leveraging at 80% gearing (and paying my own stamp duty), getting a 6% net yield, I am getting a 8.65% return on my $250k. Let me know when you find a bank that beats that. Try re-running the numbers at 8% yield. And then, as you say, capital growth is upside.

 

[nhg]

Let's use your numbers as example.

Assumptions (I can see some people stopping reading by now):
Net Yield (fo argument's sake): 6%
Cost of Debt: 4.8% (at Westpac)

Let's use some figures to make it easy for everyone (if you're even reading after seeing numbers).
Cost of Property: $1.0m
Leverage: 80%
Debt: $800k
Equity Required: $250k (including stamp duty)

Profit/Loss Each Year (I'm sure only half the people are reading by now):
Earnings Before Interest and Tax: $60.0k
Interest: $38.4k
Profit Before Tax: $21.6k

What does that mean for you (I've probably lost 90% the forum at this point):
Return on Equity = $21.6k/$250k = 8.65%

So by leveraging at 80% gearing (and paying my own stamp duty), getting a 6% net yield, I am getting a 8.65% return on my $250k. Let me know when you find a bank that beats that. Try re-running the numbers at 8% yield. And then, as you say, capital growth is upside.

These aren't the sort of yields we can get at the bottom end of the market. It makes sense if I'm buying commercial at the $1M mark using $250k. ATM though, correct me if i'm wrong, most of us are probably getting 1 or 2% net yield.

In saying that, my numbers are pretty sweet anyways, say $40k invested at 12% ROI (considering I paid down the loan) + $20k in capital growth in 1 year.

 

[turk]

These aren't the sort of yields we can get at the bottom end of the market. It makes sense if I'm buying commercial at the $1M mark using $250k. ATM though, correct me if i'm wrong, most of us are probably getting 1 or 2% net yield.

In saying that, my numbers are pretty sweet anyways, say $40k invested at 12% ROI (considering I paid down the loan) + $20k in capital growth in 1 year.

Sell your 1-2% net yielders, I've got a bundle of residential rented properties you can buy at a 3% net yield.

Puts you away ahead of your 1-2% yield

 

[Deltaberry]

The yields are just a small part of the game.

Better value is when you identify undervalued property, do the right but cheap thing to revalue it (eg simple permitting, subdivision without actual renovation) and have it doubled in value the next month, especially at the $2m+ mark.

The yield just helps give you another 10% return on equity.

 

[redwing]

I think you mean almost double the inflation rate ( the Rba rate is a meaningless number) retail rates are about 5 percent.

House price growth is less or equal to inflation.

I was reading this recently (UK based) about a book by Neil Monnery titled 'Safe as Houses: 8 centuries of housing prices'

Review

• With the perspective of decades, and sometimes centuries, the current boom in UK house prices is quite unusual. Over the long term it is much more normal for house prices to grow at around 1% above inflation, not 5%. In some countries they have not increased much at all.
• In the US real house prices increased at 0.2% per year between 1900 and 2010; in Norway 0.9% per year over the same period; in Australia 1.4%.
• In Amsterdam they grew at 0.6% per year between 1900 and 2010, and data back to 1628 suggests that house prices only rose by 0.4% per year over the nearly four centuries since then.
• Data for Paris, going as far back as 1200, supports the view that real house prices grow at less than 1% above inflation over the long term

.

Our beliefs about how house prices behave are very much driven by our own experience of them. Over our lifetimes house prices have boomed in the UK, particularly after 1995 – since then prices have tripled in nominal terms and doubled in real terms (a rate of growth greater than 5% per year).

There are few everyday financial issues more important than house prices. Whether we own one and worry about its value, or aspire to own one and are frustrated by high prices, nobody can avoid the issue.

Many people think that owning a house is a certain money spinner, but this is not the historical experience. Data from a range of countries going back, in some cases, several centuries reveals that real house prices have generally been flat over time, or have increased by at most 1% a year.

 

[redwing]

There's also

The History of Australian property Values (macrobusiness)

For those interested in the Australian residential property market, below are a collection of figures illustrating long-term trends. Housing prices and land values are compared to a basket of fundamental metrics. Australians are fortunate because much data on real estate and financial markets are publically available, going into depth not seen in other countries.

Comparing housing prices to inflation is one of the more common indicators in property market analysis. If the trend is fairly even over time, then there is no indication that people are favouring housing relative to other goods and services. On the other hand, if there is a wide divergence between housing prices and inflation, this tells us that people are considering housing to be relatively more important. Interestingly, every rise in real prices has led to a downturn, with the one exception of 1961-1964.

Another popular method of determining property valuation is comparing housing prices to rents. In a fairly efficient market, the costs of buying and renting should closely match each other, though due to factors such as taxes, risks, and interest rates, it is unlikely that costs will equal. Since the post-WW2 boom, the ratio has unevenly decreased. Upswings in the ratio suggest the presence of a bubble: the mid-70s, early 80s, late 80s, and today.

As with inflation and rents, housing prices have also outstripped incomes as well. Unfortunately, the ABS does not provide a long-term median household disposable income (HDI) series, so the denominator is derived by dividing aggregate real gross household income by the number of occupied households on an annual basis. This results in an unusually high HDI as averages are typically greater than medians, and is further amplified as the HDI is stacked with artefacts like superannuation which cannot be drawn upon to finance debt repayments. While the outcome is a rather low ratio, it keeps in line with that developed in Stapledon’s 2012 housing paper and shows a substantial increase from 1996 onwards. A more realistic median measure would result in a higher ratio, and the latest Demographia report shows it to be so.

And so on..

 

[jenni_nextplace]

The average wage can't afford the average house. I honestly don't know how some people afford to live on some wages of some households these days.

Maybe they don't and just look like they do?

 

[HotRod]

What is an average house?

An average house to me is one on the mortgage belt.

They still seem very affordable.

Only thing is, the mortgage belt moves further away from the centre of a city each year.

 

[Ausprop]

ordered some take away pizza last night and got a bill for $120...and they forgot the garlic bread. now that's an affordability issue!

 

[venno]

ordered some take away pizza last night and got a bill for $120...and they forgot the garlic bread. now that's an affordability issue!

Hope you didn't give em a tip!

 

[Angel]

ordered some take away pizza last night and got a bill for $120...and they forgot the garlic bread. now that's an affordability issue!

And WA is supposed to be in a recession???

 

[Sidney]

You know, it's interesting this whole risk thing. On Friday I watched my share portfolio lose $12,000 in one day on one stock alone (BHP, I didn't have the heart to calculate the loss on the rest). Can't just sell up because of the capital gains implications, so better off hanging in there and being content with the yield.

But it beggars the question to those advocating property to be a risky investment. What else? If you had say $1.5M where would you put it? Not stocks, surely, not if you're risk adverse. Bonds? Overseas markets? - carry trade is known as the most risky of investments. Cash in the bank? - after inflation and tax = close to $0 return. Gold? - hardly - no yield and little prospect of capital gain (and big prospect of capital loss).

The point is, property may well carry greater risks than it has in the past, but relatively speaking it is still safe as houses for those into wealth preservation.

As for those into wealth creation, well if you've got nothing, you've got nothing to lose, so I can't see a whole lot of risk there either. Surely it beats sitting and doing nothing, because doing nothing is guaranteed to create nothing.

I'm diversified, as I should be, but each investment class has it's inherent risks, no less than property, as far as I can see. Certainly not to the point that I'd consider selling the property I own, at any rate.

So, my challenge is, if not property, what do you do with $1.5M? Assuming you need yield to live off, that is.

 

[equitymate]

So, my challenge is, if not property, what do you do with $1.5M? Assuming you need yield to live off, that is.

A broad solection of Blue chips all the way perhaps via an LIC and love them franking credits. Volitility is the price you gotta pay though, if there is a downturn the sun will comeout again population growth will boost the profits of the blue chips like of CBA and WOW long term regardless.
Call me an optimist