this is how you know that property has peaked.....

Long time lurker, since the email list, first post.

Today I was catching a train at Town Hall station in sydney and I saw a bunch of people giving out free "magazines". Upon closer inspection, I was pleasantly surprised that the prominent display stand behind the handouts was non other than NII(the infamous henry kaye group). The NII people looked to be early to mid thirties, and were actively soliciting recruits to their "free initial seminar". The "magazine" that was being handed out was quite a laugh, it had in BOLD lettering, Consumer Alert and also warned of the dangers of incorrectly using deposit bonds, which i though was quite funny, considering the position of henry kaye.

Anyway, this unsual event got me thinking, i have recieved so many unsolicited approaches from developers and such organisations attempting to extoll the virtues of investing upon me, but this soliciting in peak hour at town hall was the most brazen yet. I really believe it is a sign. A sign that the biggest idiot may have been reached.

In the dotcom craze on the NASDAQ, and to a lesser extent on the ASX, there was towards the end only one driving factor, that a bigger idiot than you will buy the stock for a higher price than you. Now i do not know whether this is the case in the sydney NEW UNIT developments, but I suspect that this point will soon be reached. Even more surprising will be that this point will be reached not by a tightening of monetary policy but as a consequence of the boom itself.

I've always wondered whether this is possible, that interest rates can be low AND housing prices can fall, and this exact scenario has happened i believe in both Germany and Japan. People who have a better understanding of those markets can fill me in on the exact circumsance of each.

My experience of the dotcom boom is that Towards the end of a boom, the biggest factor affecting share price is confidence, there will be a series of "dead market bounces" in which the price will stagnate and those seeking to "get in" will always push the price up, however inevitably one time, the market will not bounce and the fall will happen. Right now I see similarities in the sydney unit market with the dot com boom, confidence, or expectations of future capital gains is the biggest driver, as confirmed in a lot of the marketing literature by developers. the little bounces in the market is harder to see, i wonder if anyone can help me out here.

However a sydney unit price fall will affect all property in sydney and surrounding areas, even discouting all fundamentals, but just focusing on the sentiment or confidence level.

If some of the veterans of the property busts of the 80s and earlier or overseas can see if my theory has some basis in empirical fact, then i would be grateful. As i confess i don't have as much experience of property as some other members of this board.
 
trugoy

I've really got to say that there are times when you have got to listen to your own "gut feel".

It is very hard to debate a topic like this on this forum as most people here are very smart logical thinkers who base their arguments on facts. I believe that "market sentiment" plays a much bigger part and many people purchasing at the moment are not doing the numbers.

When I look at the multitude of people in my own work environment that are "looking into" getting a rental property, it worries me that they have no clue as to what they are getting themselves into.

So much for "due dilligence". These people couldnt even tell you what yeild means, let alone I.R.R. or negative/positive gearing.

My "gut feel" at the moment is that most of the "plebs" out there are paying top dollar for houses because either:-

1 Owner occupiers think they are going to miss out and are having to compete heavily for a property.
or
2 Its fashionable at the moment (thanks to tv reality shows and the stock market slump)
or
3 they expect prices to keep rising at the same rate as previously.
or
4 they dont understand the numbers and what the real rate of return is going to be (relative to the risk and effort involved).
or
5 they are being pressured by the new types of sales techniques for example "buyer inquiry range- 350 to 420k"

Your post really strikes a cord with me.

I believe prices still have a way to go as long as interest rates stay low or go lower but there will come a time when interest rates will have only one way to go- and that is up- and then watch the carnage.

The bigger the boom the bigger the bust.

But as many people have said on this forum previously, there are always opportunities out there, you've just got to look harder.

Bearing in mind that I prefer blue chip growth properties rather than cash flow positive yeilders, (and competing for these at the top of the boom is plain silly) I think that the best opportunities will be about 3-5 years away when property becomes very unfashionable thanks to rising interest rates!

At the moment- look at bank stocks. typ 8% fully franked. Too easy!
 
I vaguely recall a maxim that stated something like "All booms will last far longer than they should" or words to that effect....

But, I recall that the "top" in Sydney was thought to have been reached (or is that breached..) at the beginning of 2002. Yet, here we are.......... How much longer can this go?

We have Interest Rates remaining low, and Immigration adding 1000 people per week to the Sydney area. And FHOG is still alive..... All of which adds fuel to the fire.

And, I read today that the current median house price takes 46% of AWOTE (Average Weekly Ordinary Time Earnings) - not yet at the peak (around 80%) reached in the early 90's.........

Re units, yeah, it is really not looking too good. But ordinary housing????? Different scenario (so different result is likely). I was first "warned" about units in Sydney about 4 years ago (when I was just "starting out" with property investing....)



Sorry, no answers here - just ramblings....... Could it go further ??? Hell, yeah (I think...) And (as already mentioned), the higher it goes, the more hurt it might cause.

A MAJOR event might be the catalyst that turns the current trend around. But, even there, we have a significant advantage - i.e. any bad Northern Hemisphere event would likely only add to the number of people wanting to be HERE !!! So, to my mind, the ONLY thing that would have an adverse effect in Australia would be a major event HERE !!!!

Perhaps with one exception - OIL!!!! If a world event led to a hike in the oil price, then that would lift costs worldwide (including Australia) leading to an Interest rate hike and the attendant fall-out !!!

Well, that's my thoughts - to Trugoy, I am experienced in years of life, but not so experienced in RE investing - bear that in mind when you consider my thoughts (above).

Well, I've "got up to dance" - who's next??? ;)

Regards,
 
After just getting back from OZ, I think all of OZ is in house mania! So many TV shows about housing, fixing them, investing in them, promotional materials, "gurus" with get rich quick in property scheams, newpapers talking about prices rises, OTP risks. Gosh even my Brother-in-law who declared that I was stupid (I think he used the word crazy) investing in Yarraville/Seddon (Inner west Melb) in the early 90's ("You paid $88K for that dump") was talking about investing in property!

I also purchased a house in Elsternwick (southern bayside Melbourne) in the mid 90's rent was $320 pw then, today I authorized a 2 year lease for $345pw, wow 6 years $25 pw rental growth of 7% in 6 years a little more than 1% per year, less than CPI!!!!
When I purchased, nobody else bid at the auction.

If my house is only 7% more valuable (to the pool of tenants) after 6 years why has the paper asset value more than doubled? If rental return has doubled and prices doubled then I think balance has been maintained. If Elsternwick was so wonderful place to live why would rental returns be little increased to 6 years ago but the capital value has more than doubled? The only reason I can think of is that the market expects that the excellent captial gains I have experienced are going to repeat again in the near/medium term future combined interest rates have fallen making the holding costs are less!

My thinking is that everyone needs to take great care, just because everyone thinks it is a good idea doesnt make it so! My opinion is that unless you can think of a good ways to immediately increase the value of the property in both capital gains and rental returns then in most cases it probably wont be a good investment and if you are going to buy hold and negatively gear then you probably would be better to wait. The days of excellent capital gains on any old buy and hold IP's are finished. Even blue ribbon Sydney housing stock I believe are vunerable to flat values for the next 5 years!
 
Les
I think the quote you were thinking of may have been that a boom won't end until it can do the maximum amount of damage to the largest number of people.
For this reason it could go on for a little longer yet. not because of value but there are a few more sheep that are listening to the advice and stories on TV that dont realise that its never a good time to invest when almost everyone else has or is.
 
AL has made an excellent and valid point when comparing current values against current yields. How can a property double in value whilst only increasing by 7% in rent? Because of affordability, that's why. Economics dictates that employment and wages are the driving force behind what people can and will be able to afford to pay in the rental market. In these times of inflated prices, the yields are so low that you need to be very heavily negatively geared, especially in Sydney.

The scary thing is that, as Les has suggested, it may go further, fuelled by low rates and increasing population. Compared to other major expensive cities of the world (New York, London) we are still considered cheap and expat dollars have had a hand in pushing up our prices. So many factors in this boom have contributed to the situation today, and the FHOG hasn't really helped, as first home owners have paid a premium for the pittance that the govt handed out to stimulate the housing industry. Perhaps it should have been pulled after 12-24 mths.....

Just adding some thoughts..........
 
Hi all,

I'll have a go, though most predictions turn out to be incorrect because you can't factor in the unknown.

I think Les has it pretty right in that most booms go a lot further than they should, which then creates a longer bust than it should.

I differ in opinion on correlating property with the dotcom boom, as any share boom is just about expectations of the underlying script being desired by someone else(the greater fool). Property on the other hand is one of humans basic needs(shelter). So while there is a growing population, there will always be the need for more accomodation, provided the number of persons per household stays constant.

The period we are now in is different to the 70's and 80's price booms as when the bust came back then, it only took a few years of high inflation to make the supply of property dry up, rents to rise and create the next round of cap growth. Because of lower inflation, the time between peaks of cap growth will probably be further apart, with the bust period lasting longer. Of course it depends on which property and where.

My personal preference for which way we go, is for a return to higher inflation with correspondingly higher interest rates( I can then pay off my loans with deflated dollars :D) This would be much more favourable than continued lower interest rates and deflation, which could lead to economic disaster. In other words I prefer a little pain now than a bigger boom now and greater pain later.

As Les said earlier "just my ramblings"

bye
 
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