The Wrong Type of Boom

[alexlee]

All i am saying is that you cannot look into history and say that year ** had 11% interest rate, thus compared to the current interest rate of 7.5% and conclude that Real Estate prices was flat or on the decline. Vica Versa a low interest rate does not necessary mean the market is booming.

Obvioulsy the RBA is trying to increase and decrease demand with their policy, but it doesnt mean it will work. Of course there will be a tipping point at how much you increase and decrease int rates will effect prices but until that point you cannot predict.

No, rates are certainly not the only determinant of property demand. In a recession, for example, a rate decrease may not increase demand (witness Japan) while in a boom moderate rate rises may not be enough to curb demand.

However, remember property prices is just an indirect beneficiary / victim of RBA policy. The RBA targets inflation and economic activity, not property prices. I don't know when the tipping point is either, but right now I'm also reading a recession in the cards, so I'm especially cautious when the RBA raises rates.
Alex

 

[leicachamp]

hi alex.

Can you share with us your reasons for a expected recession? I have heard others say the same thing, but would like to see your take on it.

 

[Michael Croft]

Which is why I kept my mouth shut!

Look at 1973 - 1975 - negative real interest rates and yet property tanks it. Of course, the economy was up crap creek at the time, but that wasn't the question (the question was the inverse relationship between interest rates and property markets).

M

Well, I was 'playing' in that period. It was an absolute boom time in Canberra. Gough Whitlam was in power and many govt. departments were relocating to the bush capital. So big was the boom that a builder I know was offering offering $29,995 house and land packages in Weston Creek and couldn't keep up with demand. So he ordered the agents to put the prices up $10,000 on all his houses in '73 and still they sold. He built 121 houses in 1974, and 102 in 1975, you do the math! It made him a millionaire, when that actually meant something.

So I suppose the point being, there are markets within markets. When Malcolm Fraser and the razor gang hit Canberra in the mid 70's, we moved on to the Sydney market and 'played' there for a while.

MC

 

[MarkB]

So I suppose the point being, there are markets within markets.

Absolutely.

I only chose Sydney because I happened to have the data and, as it turns out, all the information save for the real interest rate on a spreadsheet.

A different city (market) = a different result.

M

 

[JIT]

So I suppose the point being, there are markets within markets.

Yep, and that's the only conclusive point I can make out of this whole thread.

Fundamentals may not be quite right just yet (and yes, I do agree with this), but, if you know your own 'micro-market' within the broader market, and study it enough you can still make money in property - even at this general time/stage of the cycle. It's just harder, requires more skill, foresight and due diligence and may (or may not) carry with it a greater level of risk, depending on where you stand...

GSJ,

 

[leicachamp]

Great Summary GSJ.

 

[MarkB]

if you know your own 'micro-market' within the broader market, and study it enough you can still make money in property - even at this general time/stage of the cycle. It's just harder, requires more skill, foresight and due diligence and may (or may not) carry with it a greater level of risk, depending on where you stand...

Something I explored in some detail in this (ignored) thread.

These economists who quote themselves...

M

 

[JIT]

this (ignored) thread[/URL].

These economists who quote themselves...

M

That's OK Mark, I've given it the attention it now deserves!

GSJ

 

[JIT]

IMHO

the market is imperfect as is the information superhighway so there will always be opportunities for people who are prepared to take a bit of time studying the market .

Agree with that too, and this can be regardless of the apparent 'fundamentals' at the time.

GSJ

 

[BV]

Looking at Pitt St's graph and comparing price movement in the past 2 boom periods with today's market, It's fair to assume that we should see +ve (above inflation) growth and short mini booms from now on and untill the next boom.
Even without the chart, the signs of recovery are out there, rents are on the way up and buyers are out in increasing numbers.
I wonder if there is similar data for other cities.
Cheers

 

[alexlee]

hi alex.

Can you share with us your reasons for a expected recession? I have heard others say the same thing, but would like to see your take on it.

I believe that a combination of the US slowing down due to lower property prices and the mounting deficit and China's structural issues being revealed as the US slows down (breakneck growth hides a multitude of sins) will cause a recession. Detailed as follows:

http://www.somersoft.com/forums/showthread.php?p=280850#post280850

Alex

 

[leicachamp]

Thanks Alex. Fascinating thread.

 

[keithj]

I was searching for something else, and came across this thread from exactly 2 yrs ago....... and thought it was worthy of a bump.

Reading the whole thread, it looks like what some were wishing for has happened ......

 

[Ausprop]

what actually happened to alexlee?

 

[MichaelW]

Reading the whole thread, it looks like what some were wishing for has happened ......

Hi Keith, you mean like these interesting tidbits:

Can you imagine a scenario when IRs go to 12%+, mums & dads and 1st time investors feeling pain, fire sales, buyers market, followed by quality property yields increasing to 5%+? I can. For those that can foresee a fall in IRs from those relatively high levels, there will be a huge choice of quality, relatively (based on same suburb history) high yielding IP available.

A fall in IRs and yields approaching 5%+ coupled with softening prices due to pain being felt by investors and mums & dads? Who would have thought...

No i cant see that in the future. Firstly since banking deregulation during the Keating area,interest rates should not go to that high. Also there is more money borrowed in the market, a .25% increase has the same effect as say 1-2% hike in the eighties.

Interest rates topping out at less than 12% odd due to the leveraged personal balance sheets? Who would have thought...

In hindsight the 90s were a great time to buy. Efficient market theory tells us that those opportunities shouldn't exist because people would find out. Yet there were a few years when fundamental value (arguably) was higher than market price (i.e. a great time to buy). What happened? My theory: sentiment. People thought property was a crap investment because of their experience in the early 90s.

If interest rates did fall to 2%, I can GUARANTEE you demand will go up. EVERYONE will move their budget up, and people who couldn't borrow before will buy the entry level properties.

And this last one by Alex: Fundamental value outstripping market price due to poor sentiment for a period driven by fear? Never...

Interest rates falling to 2% and demand going up. Even a comment on people who couldn't borrow before buying entry level properties en masse. FHBers anyone? Never...

Nice bump Keith, thanks.

We might be a tad more insightful than we give ourselves credit for at times. I'm just waiting for the next phase of this cycle to play out. Cash rates at 3%, yields at 5%+, sentiment still soft but confidence indicators starting to turn. I like this phase of the cycle!

Cheers,
Michael

 

[BayView]

I agree with you regarding the quality/top end of the market that you mention - OOs will always be a majority and usually pay cash - they will take low risks.

I wouldn't bet on that.

There are plenty of upper-end areas which have plenty of people who have wanted to live there, but couldn't previously afford to, and have now got the income level behind them to support borrowings for a property in that area.

So, they borrow like mad and move in. Their livin' the life now. Look at me; I'm in a "postcode" suburb.

These are the properties most likely to be sold off cheap when the market goes south and the owners lose their high paying jobs and the Beemer is repossessed.

 

[House_Keeper]

Originally Posted by jingo
Most of the advice relating to investing in residential properties at the moment is to buy in the inner and bayside areas. This opinion is expessed because these are the areas that are most in demand with many OO's, and therefore, in the opinion of the experts, will continue to see long term sustained capital growth.

I agree it's excellent advice - always has been always will be. It's what OOs want. But right now it's relatively poor value - 5 yrs ago it was better value and maybe it will be again in 5 yrs time. The excellent advice above will still be equally valid - it's a constant.

I don't quite understand that statement Keith.

Let's focus on a specific market for a moment. Let's say Sydney inner west properties priced around 500K for example.

• Prices are slightly above what they were 5 years ago, maybe 20% above.
• Rents have increased by almost 50%
• Interest rates are lower than 5 years ago.

In what way does this make it poor value compared to 5 years ago?

Thanks,

 

[keithj]

I don't quite understand that statement Keith.

Let's focus on a specific market for a moment. Let's say Sydney inner west properties priced around 500K for example.

• Prices are slightly above what they were 5 years ago, maybe 20% above.
• Rents have increased by almost 50%
• Interest rates are lower than 5 years ago.

In what way does this make it poor value compared to 5 years ago?

Thanks,

Hi HK,

See the date of the post & remember what conditions were like in mid 2007 -
relatively low yields & high IRs.

OTOH, todays economy is nirvana for for some - relatively high yields & low IRs.

Cheers Keith

 

[House_Keeper]

OK. I understand now.

I didn't notice that this thread started in 2007.

It looks like it was quite prescient then.

Cheers,