reflections on the Perth market

[Ausprop]

interesting what's happening... we all know the Perth market has splintered into 2 or 3 categories, cheapies which is doing ok, top end which is hot, then there is the middle.... I am talking about far flung mortgage belt suburbs. affordability is shot and petrol prices aren't adding any appeal. New builds are not selling and supply is coming on fast as boom time speculators from far and near unload their heavily neg geared stock and spec homes.

What I have been pondering is... house construction prices are reported to be in for big price shocks as a result of resources being diverted into infrastructure and commercial projects ($30k a house was recently reported). Land prices I don't see going down, they cost $x to create, developers won't undersell their clients by cutting below what they have sold previous similar lots for... not to mention fuel and labour costs for development still on the rise. yet people can't afford them.

where is all this heading? we have new houses selling below replacement, people can't afford new house/land, yet the population is growing strongly and everyone needs a roof over their heads. If you can't afford to buy you rent.

I can only see very significant rent increases in the near term.

Thoughts?

 

[Aaron Sice]

incredible rent increases coming up. stupid even - likely to see 20% plus this year alone.

my advice to anyone in Perth - buy something either close to the coast (ie west of marmion ave / stock road) or close to the city (como, cloverdale, mt lawley, wembley etc) and nothing in between until this settles down.

i personally am out of the IP game until mid this year when we have some trend direction established here in Perth. If i do get back in, it will be a 2x2 inner city apartment off the plan.

FWIW, i sold my $360k IP at first home open (88sqm 1987 3x1 Beldon) and my house (Karrinyup) sold without a listing for a record for an original (but renovated) front strata.

The market is still strong for FHO stuff, but anything above $400k has stalled. You HAVE TO be a DINK to be able to afford that mortgage if you're young. and anything over the $1mil mark is also doing well.

Watching interest rates very closely too. Looks like another rise in Feb, XJO not doing too flash. Either way we're either at a rates top and they will head south, or we are at serious support and will only go up from here. Nothing will be left on hold.

that's my opinion and is to be taken with a grain of salt.

 

[flowkingrich]

Well I recently have had to consider a PPOR in Perth or renting and I know what I would be doing. It is far cheaper to rent and there isnt any growth to offset the con of having to pay rent.

We serve one of two masters: landlord or bank.

Rents will have to go up if everyone owned a calculator and thought like me. But how far does that influence inflation. Does anyone know what proportion rental income growth contributes to the inflation figures assessed by the Reserve.

Here is a thought if rents did go up then there would be little left to spend on retail and hence slowing inflationary pressure. Of course staple items will rise due to fuel costs but thats life.

Not sure if i contributed to your thread or started a new one but you have got me thinking

 

[Ausprop]

a good contribution becuase it is a real life decision being made on the ground. I think your analysis is spot on - if it is a middle tier style home you are considering then yes, rent, offer a l-o-n-g lease and the landlord will love you and your rent exposure is protected.

 

[Ausprop]

incredible rent increases coming up. stupid even - likely to see 20% plus this year alone.

not sure if 20% qualifies for incredible or stupid status... the costs of ownership has gone up so much that i would say 20% would be a minimal expectation, particulalry given the tightness of the vacancy rate

 

[Aaron Sice]

yeah but 20% these days is expected - imagine putting that forward 5 years ago!

it still a huge increase regardless of whether everone else is doing it or not!!! i wouldn;t like to be slugged with a 20% increase on anything!

i wonder if rent control will be on the next political agenda...?

 

[TheBacon]

All my observation are anecdotal, from looking at RE.com, reading newspapers, etc. I have similar observations…

First home buyers are still in the market, but of course only in the price segments that they can afford. However I don’t see a boom here, just steady, maybe small rises in some areas.

Mid-tier, second homes, family homes, $450k - $1mill stalled in 2007, perhaps even went back 10% where I live (Bassendean, and surrounding suburbs). They are selling again now, slowly, but mostly coming on the market at reasonable/reduced prices.

Top end still OK, apparently. Actually I am not sure of the top end – I don’t really pay any attention to property over the $1m mark, so maybe its booming, who knows?

So…

First home buyers – steady
Mid tier – slow (but no longer declining)
Top end – good

The boom is well and truly over in Perth. Still money to be made, but might be tricky over the next few years. Buyers will need to do research and look for good value again, the dart-board method of property selection won’t help for the near future. Value adding will need to be done carefully also, can’t do a cosmetic $10k reno and bump the price $40k any more…

A new house 20km from the CBD in a new development is generally too expensive for the FHB at the moment, unless DINKs as mentioned above. What 25yr old on $50k can afford a $400k+ mortgage? Even a couple on combined $90k would struggle unless they had a significant deposit or equity (but then they wouldn’t be FHB, would they J ).

Unless wages rise quickly in 2008 (always possible in a mining boom, which is still going on in Perth), I would think that prices for most property will be weak to neutral in Perth this year.

Rents on the other hand should continue to rise, maybe not 20%+ like 2007, but still rise.

OK – putting the crystal ball away J

 

[The Judge]

I think a 20% increase would be very low, consider a quick example. A property with a mortgage of $400k renting for $300 week - have kept the figures rounded for simplicity. If interest rates go up a modest .5%, then rent would have to increase around 13% just to cover this. Is this being too simplistic?

 

[The Judge]

Also wanted to add that I believe rent yeilds will improve enticing investors back into the market which may be stimulus for prices to increase

 

[Aaron Sice]

Also wanted to add that I believe rent yeilds will improve enticing investors back into the market which may be stimulus for prices to increase

totally agree.

Perth might be stagnant, but there'll be no trend reversal - just accumulation phase.

people aren't selling for less than their asking price.

 

[gooram]

Unfortuntely I have to sell into this market. A "middle tier" house at that. Hoping to get around 650k.

After this I'll be looking to buy smaller, i.e. 2 bed villa, in the Mt Lawley area, somewhere below 500k. If I can't find anything I'm happy with I'll be renting for the time being.

My preference to buy is more personal than market related, however I do have confidence in the area as already mentioned.

Initial thoughts were to buy my partner out of the house we are selling but moving to a single income and taking on a 300k+ loan for a house that has probably run it's course and won't do much over the next 5 years or so, it seems a little silly.

I have just increased the rent on one of our rentals 12.5%. Good tennants (young punks, but pay the rent and look after the place) 25k outta the city, I thought this was going easy on them

 

[jaycee]

I'm wondering that myself….. wether to hold / sell

Nollamara villa purchased in 04 for $232k (106% borrowing) - now looks like its worth around $385 (+?)

Do I hold the property & refinance another IO loan ? Current loan = 7.2% interest fixed till June 09
Do I sell, & look for a better investment oppty ?

Have been lucky enough to have the same tenant sicne day 1, rent started at $185/wk… now $225

 

[gooram]

I suspect Nollamara will be one of those suburbs to struggle over the next few years. Not necessarily fall in price but remain stagnant for some years. FYI - I have friends that just bought in there last year, a 3x2 villa for around 380k on Ravensthorp.

It all depends on your servicability I reckon. If you sell, you'll be up for CGT, leaving you less than you would have if you use the equity that you currently have. But if you can't afford to keep Nollamara and borrow again to invest elsewhere, then you have to be pretty sure that you can do better elsewhere before you decide to sell up.

 

[Ausprop]

hey Jaycee I have a similar dilemma with a bunch of villas in mandurah that are pretty much the same, cost $200k worth about $380k. the tax would be painfull so have pretty much decided these will be long term buy and die type stuff. i figure if i can let inflation erode the mortage and eventually discharge them it will be $50k a year or so in indexed income plus cap growth.

all other resi IPs with skinny margins are just churn and burn for me. particulalry any that fall under CGT... a no brainer selling them

 

[jaycee]

Servicability is ok - I managing (just ! but thats cause an bade debt is being paud off till Oct @ $180/wk (almost my contirubtion to the IP before tax return), and thinking of using an LOC to cover expenses for this & next year.. (which will see the LOC & IP mtge increase while reducing my PPOR mtge - total $65k)

I figured, with $150k profit roughly, I would be up for... $35k CGT ? = say $115k (less $65k LOc/PPOR mtge) = $50k cash...

Are you suggesting this has the cahracteristics of a "hold & die" for you ? My problem is that don't think I know enough to judge one from another...

 

[Ausprop]

well it's never worth being too stressed but it looks ok to me... just ensure you channel all earnings into the PPOR to get rid of the bad debt.

your rent looks light.... I am getting more than that in mandurah and the rents down there are really cr@p. i would have thought $280 at least - check it out

 

[jaycee]

Thought about that with the rent... there were places renting at $240 /wk when I last searched (very recently), so I wondered about that.. think it's about 6 mths since the last rent increase

with over 1 year to go on thei current IO Loan, I have plenty of time to "change my mind" I guess... Need to determine how what type of refinancing at the end of that I guess.... My first idea was to use an LOC for expenses for the IP & channel the rent & other contributions I was making to the IP into the PPOR mtge - but, not enough time to do that & get the balance to zero before the loan term runs out, will still be about $20k PPOR mtge

 

[TheBacon]

I think a 20% increase would be very low, consider a quick example. A property with a mortgage of $400k renting for $300 week - have kept the figures rounded for simplicity. If interest rates go up a modest .5%, then rent would have to increase around 13% just to cover this. Is this being too simplistic?

It would seem to me that rents dont always logically follow prices. Therefore often one can get times where the rent appears much lower than it should be compared to the house price.

This may be due to a number of reasons including...
A large percentage of landlords have had their IP for a long time, therefore current market prices and interest rates are not that important. That is, they dont owe 100% of the current market price, might actually owe 50% or less. At this LVR they might be happy with low rents as the mortgage is covered.

Tenancy terms are mostly 6-12 months, so it can take a while before the whole market is exposed to the potential of a rent rise.

Many tenants renew - many landlords are keen to keep tenants in and will keep rents low to help with this.

I hope I'm wrong and we get the continued big rises. I'm not one of those owners to whom rent is irrelevant

TB

 

[Francesca C]

Sorry, I havent read all the posts.

I love what happened in Perth. I started my investment career just before the boom and built myself a decent portfolio.

I had the pleasure of watching the entire thing from start to finish and getting in there and thinking I was missing out... I became a sheep, driven by greed, thankfully it worked out well... but now that I look back my entire strategy has changed and I am blessed to have learnt so much in 3 short years.

I am too young to remember any other cycle... so looking back, I have compounded my learning.

 

[MTR]

Also, rents along the northern coastal corridor are alot higher than rents along the southern coastal strip. Hoping that south will eventually catch up, but wont be holding my breath.

Rents for my inner city stuff are doing very well, with continual healthy increases.

Francesca C, I also became a sheep, thought the boom lasted 5 long years, not a bad run.

MTR