The perfect storm for Property Investors!

[MichaelW]

Hi Guys,

Its been a long time since the property market has been moving so strongly in favour of property investors. Here's the latest statistics out for NSW in particular on housing starts and some other related information:

Rates Steady but Rents Rampant

THE NUMBER of new houses and apartments under construction in NSW has slumped to its lowest yearly level in 38 years, with the weak property market likely to put even more pressure on rents.

But the Reserve Bank was the surprise bearer of good news yesterday, suggesting interest rates may remain on hold in the coming months.

As investors we have to ask what the following environment means for house prices:

1. Rents Rampant, running at 10%+ pa growth rates. Mine going up 20%.
2. Yields now back at around 4.5% - 5%.
3. Rates Steady. RBA suggesting they might have done enough.
4. Vacancy Rates falling. Less than 2% in NSW. My local postcode less than 1%.
5. Immigration at the highest level in a decade. From memory it was projected 100,000 next year to settle in Sydney.
6. Construction falling. At its lowest level in 38 years.
7. Current housing construction shortfall at 25,000 - 40,000 dwellings per annum.

The Housing Institute of Australia's chief economist, Harley Dale, said the addition to the housing stock in the past year was at least 25,000 short of what was required to satisfy underlying demand.

"Several years of low home building has meant that Australia has now accumulated a huge shortage of housing for both the owner-occupied and private-rental market," Mr Dale said.

Master Builders Australia said there was a yearly shortage of 40,000 new houses.

The number of new dwellings being built in NSW has almost halved since the peak of the market in 2002.

My crystal ball is still a bit foggy, but I don't think it will be too long until my "Tipping Point" Hypothesis is put to the test. I think a 2% differential between the prevaling rental yield and the variable mortgage rate will see the market tip back to upswing.

It might be 2009 or it might be 2010, but things are certainly moving in the right direction.

Happy days!


Michael.

 

[Rockstar]

Hi Guys,


As investors we have to ask what the following environment means for house prices:

1. Rents Rampant, running at 10%+ pa growth rates. Mine going up 20%.
2. Yields now back at around 4.5% - 5%.
3. Rates Steady. RBA suggesting they might have done enough.
4. Vacancy Rates falling. Less than 2% in NSW. My local postcode less than 1%.
5. Immigration at the highest level in a decade. From memory it was projected 100,000 next year to settle in Sydney.
6. Construction falling. At its lowest level in 38 years.
7. Current housing construction shortfall at 25,000 - 40,000 dwellings per annum.

Michael.

8. Terry Ryder has predicted that the area that most of my property is in will be the next hotspot in NSW.

Thanks Michael.

 

[Highlygeared]

Possibly the tipping point - problem in my view is unemployment. If that starts to go up, and I'm seeing redundancies all around me, I think that may delay the boom. I think a boom in earnest is at least 3 yrs away, possibly longer.

The stats you mention are there for all to see but in a recession, everybody suffers, and people won't stomach the rent increases we've seen, despite the tight supply. In fact, I wont be overly surprised if the rental increases were no more than CPI for the next few years, or stay dead flat.

I think we're drifting towards the bottom but not there yet from my analysis. There are hardly any buyers in the areas I've been watching and its a matter of time before prices drop further.

Something tells me the worst is yet to come. Would that stop me from buying, not necessarily, but I'd want a real bargain on fundamentals to buffer against any potential drops later on. Time will tell.

 

[MichaelW]

Nice post HG!

I agree with everything you've said. The lead indicators are starting to align for property investors, but it might take some time for this to translate back into strong growth.

I think I even read in the Fin Review today that Margaret Lomas said plainly that this decade will be different from the last where global credit expansion fuelled booms. Now you'll need to be more discerning in your property investments to make strong returns. No longer will it be a case of a rising tide lifts all ships.

I haven't seen the same drop off in buyers to the same degree in my area as yet. But that well could happen in time. Margaret Lomas also made the point that it takes 6 months for sellers to realise they can't achieve their hoped prices and to drop prices back to the market. So we could be 6 months away from reports of dropping medians flowing through the media and bringing on that bottom that you suggested we're drifting towards. I'd agree with you that we're not there yet. Pessimism is at all time lows and won't turn around instantly. A bit more negative media, dropping medians and we're probably 12 months away from the pit of despair.

But the basics are still all positive and moving in the right direction for now. Meaning that yields will continue to strengthen, particularly if prices come off a bit too. I'm a tad more optimistic about the potential for an Australian recession. I can't see it happening any time soon. There's been some job losses but unemployment is still near record lows. Retail spending is down, but the commodity sector is still going gangbusters.

I think AlexLee and others waiting another 12 months will have a field day in certain suburbs. There's positive cash flow buying out there already. In 12 months time it will be even better buying for those game enough to do so. Still, if you're holding then its also improving for you as yields improve. In that case you're best off holding on and riding your improving yield curve and waiting for the price upturn in the future.

All very exciting.

Cheers,
Michael

 

[LynnH]

Michael

Do you have a page no. for the print version of that AFR article which mentions Margaret Lomas? Must have missed that one this morning. Thanks.

Cheers
LynnH

 

[tubs]

It is exciting. All the ingredients are coming together, steady rates, high yields, increasing demand (esp from immigration), supply not keeping pace.

Its all simple stuff, a despite the stats and graphs the D&Gers throw at us, its very hard to overlook the fundamentals.

 

[Francesco]

If RBA is pausing on IR increases for the meantime, I hope petrol prices do not let up. Continuing flow-on of IR increases and petrol costs should wipe out tax concessions from budget. The poor share market is playing its part. This is what we want - low consumer sentiment to stay RBA's hand on IR. Unfortunately, there will be pain on unemployment, but this environment should steer inflation downwards month by month and hopefully we will see some recession to bring a move for lower IR - thence another boom. Classic.

 

[Highlygeared]

I'd like to start making some crazy offers and snap up some bargains...if only I wasnt so HG-ed

IMHO, the optimal point to jump in is when you can buy reasonably blue chip property in the inner suburbs at an easily achievable yield thats < 300 basis points from pre-discounted variable rates in an environment where rates are starting to fall - early enough so you don't miss out on any substantial cap growth and late enough so you don't pump in too much to hold an investment that isnt going anywhere fast.

My lesson from the late 90s. Should work if history repeats itself.

 

[MichaelW]

Do you have a page no. for the print version of that AFR article which mentions Margaret Lomas? Must have missed that one this morning. Thanks.

Hi Lynn,

Yes, its on page 73, top of the right hand column:

In the past decade, Lomas says, property investors have probably done well regardless of their skills or personal efforts but the next decade will be different.

"The coming 10 years are going to bring a period where only those prepared to do the right kind of research and uncover areas with strong intrinsic growth drivers will prosper from property," she says

That whole article is a good read and she has more to say than that quoted.

The following page has an article titled Sydney rents soar as gen Y queues to sign leases which is also a great read with some really interesting information in it. It even has a few suburb examples such as:

In The Rocks, for example, a unit selling for $615,000 could rent for $1100 a week - a gross yield of 9.3 per cent.

And there's more...

There's also an article on the ACT market and another article on Housing North of Sydney outperforming Perth. Lizzie would like that article as it makes a strong case for Newcastle and then for Gosford. Some very interesting reading today.

Cheers,
Michael.

 

[Aaron Sice]

I think a boom in earnest is at least 3 yrs away, possibly longer.

I think we're drifting towards the bottom but not there yet from my analysis. There are hardly any buyers in the areas I've been watching and its a matter of time before prices drop further.

then we have 3 years to accumulate more property - this is also my rough prediction as well.

i have QLDers buying up WA developments over here that I have drawn from 18 monhts ago. they're DA approved and ready for building license / construction.

now that says something to me - something a bit deeper than "gee they're late to the party".

 

[Highlygeared]

then we have 3 years to accumulate more property - this is also my rough prediction as well.

i have QLDers buying up WA developments over here that I have drawn from 18 monhts ago. they're DA approved and ready for building license / construction.

now that says something to me - something a bit deeper than "gee they're late to the party".

Youre saying the off-the-plan Henry Kaye wannabes are starting to mobilise?

Truth of the matter is noone really knows WHEN - my advice is always buy anything anytime provided its a bargain in fundamental terms - good location, good yield, hi land content, at least 2/3 bedrooms, has parking etc etc. Having said that, I dont feel rushed to go out there just yet.

But i paid the price for NOT being a contrarian the last time - I wont be making the same mistake again.

 

[MichaelW]

IMHO, the optimal point to jump in is when you can buy reasonably blue chip property in the inner suburbs at an easily achievable yield thats < 300 basis points from pre-discounted variable rates in an environment where rates are starting to fall - early enough so you don't miss out on any substantial cap growth and late enough so you don't pump in too much to hold an investment that isnt going anywhere fast.

My lesson from the late 90s. Should work if history repeats itself.

And the same lesson I took from that period and from where I derived my Tipping Point Hypothesis.

I like your theory, and I can apply it directly to my Mona Vale development. In effect, by developing that site I will be "buying" three properties on the site which currently holds one. The three will then have a yield on my total debt of 6.6% and the one to be bulldozed is currently only 4.5%.

So, I'll be buying three premium properties on the Northern Beaches with a yield of 6.6% when the prevailing mortgage interest rate is 8.6%. Only 200bp adrift! And that yield is on today's rental numbers. Another 30% jump in rents and they break even despite us being at the top of the interest rate cycle. As rates fall that's just gravy train cash flow positive time with some big assets sitting there waiting for the eventual price upturn. Happy days!!

Anyone going to suggest 30% rent rises over the next 3 years is out of the question? Even if half that eventuates, I'll still be able to comfortably hold them on an improved cash flow position than the current one has me in. But even at 4.5% yield today that too is comfortable for me at the top of the cycle. All good really...

And here's a quote from John McGrath's Market Review for Winter 2008 that is in a similar vein:

With 25 years' industry experience, I have been through several property cycles, and the old credo that 'hindsight is a wonderful thing' is so true in real estate. So many people have looked back and thought: "If only I'd bought property then". It's human nature to rush in when things are going well, but it takes intelligence, foresight and sensible reasoning to go against the mob and buy at a time when market sentiment is down, prices are lower, and people are nervous. I believe that right now is the time that consumers will look back at in two years and say: "If only..."

Thus, despite all the negative predictions and gloomy analysis from various commentators, I'm going against the grain with what might seem like a bold statement, but I really believe that Sydney is now in one of the best long term property investment climates we have seen in a decade. With softer prices and rapidly rising rents comes great opportunities and the time is now.

There's pages and pages in that market review but I only have a hard copy. He even gives his hot picks with sound reasoning for each based on the sub-regions within Sydney. But given its all doom and gloom on here at the moment I'm probably safe in assuming this is all just irrelevent drivel that will be drowned out by the sensible harbingers of doom. Noone is actually interested in investing in property any more right?

Cheers,
Michael

 

[Player]

You've started a great thread Michael.

Let's hope that consumer/retail spending remains down after the next string of tax cuts kick in and the masses realise that maybe they can save some of that to help them in their financial journey; rather than spend it all on such necessities as plasma's, home theatres et al.

Otherwise the forecast of BIS Shrapnell may eventuate. They are amongst the more pessimistic and reckon that another 0.5 % rate rise is likely this year and possibly in one hit around Sept. Then they are predicting a flat/sideways property market with rate falls from next year or so.

IMHO there will be some more distress over the next 6-18 months and subsequently some great value buying will occur.

Having said that I purchased a gem two weeks ago that I will end up developing. There are opportunities everywhere. The price to pay in advance is to invest the time to look and work out how a deal may fit into one's own strategy and circumstances (LVR & DSR) at a given moment in time

THere are diamonds in the rough every where and the rough may get a bit rougher in the next year or so.

Like a good boy scout.......be prepared. Luck is when opportunity meets preparedness.

 

[HiredGoon]

If RBA is pausing on IR increases for the meantime, I hope petrol prices do not let up. Continuing flow-on of IR increases and petrol costs should wipe out tax concessions from budget. The poor share market is playing its part. This is what we want - low consumer sentiment to stay RBA's hand on IR. Unfortunately, there will be pain on unemployment, but this environment should steer inflation downwards month by month and hopefully we will see some recession to bring a move for lower IR - thence another boom. Classic.

Higher cost of living eats into peoples wages, rising unemployment and the need to lower interest rates because of economic conditions => house prices to boom. Wicked!

Go for it! Every time the unemployment rate goes up buy another house for the impending boom!

 

[boomtown]

Im busting for the RBA to give us just one more interest rate rise to cause a stampede for the exits.

A hike in the price of petrol to $2 per liter would be helpful too. I wonder if I could trigger a small war in the Middle East.

Hired Goon: my target market are young doctors and lawyers with no kids. Im not the slightest bit concerned about their ability to pay rent even in a recession.

 

[LynnH]

Hi Lynn,

Yes, its on page 73, top of the right hand column:

Thanks, Michael - that'll teach me for scanning the headlines! Didn't think of Margaret Lomas when it looked as though the article was going to be all about LPTs!

Agree - it's an interesting article.

Cheers
LynnH

 

[BV]

Anyone going to suggest 30% rent rises over the next 3 years is out of the question?
Michael

Michael
If you keep on increasing their rents they could downsize or could move to cheaper suburbs.
Perhaps you should buy a few IP's further out so you can catch them as they move through the suburbs...

 

[Seaview]

What would happen if Kevin Rudd capped rent? This has apparently started happening in Spain. (sorry I cannot recall where I read this, but it was a rude shock to contemplate)

 

[Bill.L]

Hi Michael,

One little snippet of info that I have gleaned, is that property starts to accelerate in price as interest rates start to rise.

When you look back on history, the last few booms seem to happen just as rates start rising. The Interest rates fall in a recession/economic slowdown and cap growth does nothing, then just as everybody thinks property is dead, it starts to rise as they increase interest rates. Of course the rising rates put many off investment at that time.

My feeling is that when interest rates drop, is the time to start looking for that bargain, but there is no rush.

Patience little one patience.

bye

 

[agent007]

What would happen if Kevin Rudd capped rent? This has apparently started happening in Spain. (sorry I cannot recall where I read this, but it was a rude shock to contemplate)

Are they also capping interest rates?. Is this the end of the capitalis system as we know it?