Recipe for Sydney BOOM

[BayView]

I agree with Land;
if a property is good value and has a pos cashflow as well, in an historical cap growth area, and is showing no signs of this ever changing (population decrease or dying industry etc), then it would be a good buy.

The problems occur in times like this when people have high LVR's, and high neg cashflows as a % of their earned income, and the cap growth stops.

Add to that a few unforseen rate rises and voila! foreclosure.

 

[MichaelW]

The funny thing is though, the places I've looked at, that are nearly positively geared - have all fallen 30%+ in the last 3 years. What does that say for the rest of Sydney, that has gained slightly, or fallen well less than 30%?

Simple, it says its less dependent on yield to support price.

There's several examples of suburbs with 50%+ outright ownership. What do they care what rental yields or interest rates are. They're rich BBs sitting on their $2M property in their sought after location. They don't need to sell and don't care much what they could sell it for as they don't need the cash in the PPOR. The economy is something they used to worry about in their wealth generation days, but now its all just gravy train on their invested lifetime annuities.

Be careful not to brush the entire Sydney market with the same colour. There's a lot of grey in the mix...

Cheers,
Michael.

 

[Land]

Sunder,

I do understand some of your logic, but there are so many variables at play, including the big emotional factor as well.

The thing about OO having principle and interest loans, I'm not sure that's really going to be the case going forward, I am hearing of more and more OO going interest only, and letting inflation reduce the real value of their loan before kicking in with the principle payments in 5 years time.

I think Michael Whyte raises an excellent point: we all analyse the property market as if it's a purely investor based market, but it's actually overwhelmingly not (to the tune of aboout 70% OO), which is half the reason we all invest in property in the first place, it's lovely and stable, even the cycles are like nice big gentle lines of swell.

I think that the emotional factor for Joe Average will be interest rates coming down which will improve affordability - albeit, just before it gets worse again as everyone starts to panic and buy in thus pushing prices back up again. This leads into the sentiment argument, which can shift extremely quickly.

Joe Average is gonna start getting the $hits with getting whopping big rental increases every 6 months (from all of us , will see interest rates coming back down again and will think "stuff it, I'm buying my own place" and all will tell all his mates at the pub on Friday night that he's bought his own place for only 30 bucks more than he was renting, and his missus is so happy now because they can hang pictures on the wall, and the next thing you know, the next upswing!!

Sounds simple, but it's actually how things happen.....

 

[evand]

I thought positive cash flow and long term historical strong cap growth were mutually exclusive. You cant have both.

I agree with Land;
if a property is good value and has a pos cashflow as well, in an historical cap growth area, and is showing no signs of this ever changing (population decrease or dying industry etc), then it would be a good buy.

 

[Jacque]

Hi Jacque,
I think I know the house your are talking about - now they actually mowed the grass it does look better

It would be difficult to get a house that cheap in that suburb now - one sold up the road from there for 385k around a year ago and would have to be worth 50k more now.
Although Victor Kumar told me the other day one of his clients almost picked up a fire sale for around 300k , so there may be the odd bargain out there still.

Personally I am looking yields around 7% in my choice suburbs now - I got the Residex best rent reporte on Wednesday and for the first time in a while a number of suburbs now have Houses (not just units) listed at better that 5% Rent and 5% cap growth - so it looks like the time is very near now for us investors....finally.


David

Hi David

Looks the same to me, but then again it's still a small box of a house, isn't it?!

Agree 100% that the time is right ("very near" may well be good enough) but leave it too long when interest rates drop and/or rental yields catch up and your negotiating position will be weaker. Competing buyers always spoil the party

I was chatting to someone the other day who said they were waiting until int rates came down at least 1% before buying back in. The trouble with this strategy is that, depending on timing, every other investor may be thinking the same thing and hanging back.
1% extra on IO repayments on a loan of $400K is $4K p/a (even less after tax of course)
If you're then competing with those other buyers who've rejoined the buying ranks, the increased price you pay may well eradicate or override any interest savings you may have made by purchasing when rates were 1% higher. Just some food for thought anyway.

As Michael rightly points out, Sydney in particular is a mixed bag. The suburbs hurting the worst right now may well have more pain to come, but how do we really know how long this is likely to last, for sure?
One thing I do know is that those suburbs that have gone backwards since 03-04 are throwing up some fantastic buys right now- so what if you miss the "actual" bottom of the cycle and buy 5% more than the lowest point?
If the property is yielding well (and these can only improve) and you intend to hold it as a genuine medium to long term asset near enough may well be just as good. At least we know we're not in a BOOM market

 

[Witzl]

Excellent post Jacque - i couldnt agree more

 

[evand]

Thats true but you don't know if we've reached the bottom yet. And even if we havn't property prices can do nothing for a looooong time. And go backwards relative to inflation.

I dont think its about picking the top and the bottom. Its just about waiting to se when a clear trend has established and buying in. Also waiting till yields aren't so low in decent growth areas.

Isn't one of the main ideas behind investing to buy in times of D & G/low and then enjoy the ride up, and the problem is that novice investors only buy towards the top and get their fingers burnt because they end up with little or no CG?

 

[BayView]

I thought positive cash flow and long term historical strong cap growth were mutually exclusive. You cant have both.

It isn't always possible, but it is possible to get the two together occasionally.

It all depends on:

1. the timing of when you buy the property - high yields with lower prices and lower interest rates - which might be the case sometime late next year in many areas.
2. interest only loan
3. decent sized cash deposit
4. decent depreciation
5. what you call "historical" for cap growth. It can apply to virtually any property in Australia if you go back in history far enough.

We bought 2 properties in 2003 that were pos geared (with no cash deposit either), and have doubled in value since then. That was near to the start of a boom in that area, and the yields were up around 9, 10% and the rates were around 6% from memory (?) at the time.

There had no doubt been a few years of little growth in the years leading up to when we bought. So it does/did exist.

I think the mindset that they don't exist together applies more to city properties, which is where most investors look.

 

[harb]

I dont think its about picking the top and the bottom.

I fully agree with you, as they say in the stock market - If you try to pick the bottom you end up with smelly fingers.
Investing in R/E is a long term investment and over a long term the trend will always be UP.

cheers,
Harry

 

[Peter 14.7]

Evan,

You mention waiting for clear trends and the fact is most of us here are seeing it. Despite all the hype it appears, most here are no gu-ho on property all the time. I sold out of almost everything by end 2003 and got back in only in 2007.

I am seeing trends similar to 2000, 1987 etc now..hence i am pro-property.

Obviously do your research but I suggest pick an area and research it well. But dont wait for reports in the paper becasue it all too late by then, Subscribe residex, etc.. but dont lose sight of fundamentals.

If a IP costs $5k after tax and is worth $300k then it only needs to go up 1.5% to break even. 1.5% is not much at all. That hardly any trend. In all my experience booms start when:

• the rents are high but prices low and supply is tight. Like now.
• Then rents go higher but prices go up and supply is tighter.
• The supply comes on and rents slow but prices still go up as those following trends get on board.
• Eventually rents stall and heaps of supply hits and many renters have bought.

Rates influence this but only to the extent of being a mathematical factor. I mean if rates are 10% and rents are positive geared then why not buy? Same way if rates are 7% and rents are heavily neg geared, no reason to buy. Yet in the second example rates are 3% . lower. People saying I will get in when rates drop 1% are missing the point.

The difference is not the rates but the return.

In the end , with residential property, is all about Supply versus Demand.

If over night, in Sydney, the gov put in a fast rail network with no stops from Goulburn to Sydney CBD in 30 minutes. Demand for innner city would drop and Goulburn would rise. But as there is lots of land in Gulburn to build upon the constraints are not there

All those boom towns in WA mining did not boom becasue someone thought $50k was good value for a house with no CG prospects even when it renting for $100 a week. Plenty of those in western VIC.

When demand from mining kicked in and house was renting for $200 a week then it was cheap and prices went up so you got CG.

All this talk about Aus house being overvalued against the World by 30% is irrelevant. Because the world has not had increases in coal, iron ore, etc by 200% like we have. How many mines in the middle of London?

Peter