"We are not in a property bubble"

[Mikhaila]

LB,

Thank you for answering promptly. I wanted to hear the answer as IMHO you have a huge gap in your formula and subsequently form wrong view about this particular asset market . You basically provided 4 reasons how you put value on residential realestate:
1. Rental Yield;
2. Expected increase in rent;
3. Cost of building new;
4. Investor sentiment (whatever it means to you and however you measure it – doesn’t really matter)

Australian residential market, even today, fortunately has less than 50% of investors. It means generally 50% of market participants just don't care about points 1,2 & 4. The cost of building new dwelling still important. To put simply when people buy RRE they mostly use factors like - "need more space", "what to be closer to school/beach/transport etc", "want less maintenance garden" etc, etc, etc. These people don't care about rental yields or future rent increases or some investor sentiment, and rightly so.

The vital bit is a supply and demand rule, and ultimately scarcity of land in desired locations. You asked several times to show where you are wrong with your logic. Well, this is where - you discount the most important element out of equation, and this is despite the fact other people were pointing to you about this fact before in their posts. You just continue your mantra about relationship of RRE values and rental yields and keep asking where you are wrong. This is where - rental yields are not the only main value factor in Australian RRE market. It is that simple!

I know you may go about the Economist myth no X, Japan and Hong Kong RE history etc. This is all very good and may or may not be relevant. It was discussed before and there are several opinions on the subject. The point is you wrong by judging Australian residential market using only parameters you mentioned, hence your opinion about % price fall, if we are in a bubble or not etc. pretty difficult to take seriously, even despite the fact some other people here think it is professional investor view.
M.

 

[always_learning]

Originally posted by Mikhaila


To put simply when people buy RRE they mostly use factors like - "need more space", "what to be closer to school/beach/transport etc", "want less maintenance garden" etc, etc, etc. These people don't care about rental yields or future rent increases or some investor sentiment, and rightly so.

The vital bit is a supply and demand rule, and ultimately scarcity of land in desired locations. You asked several times to show where you are wrong with your logic. Well, this is where - you discount the most important element out of equation, and this is despite the fact other people were pointing to you about this fact before in their posts. You just continue your mantra about relationship of RRE values and rental yields and keep asking where you are wrong. This is where - rental yields are not the only main value factor in Australian RRE market. It is that simple!

I wish to raise a point not because I believe Mikhaila is wrong but because I believe should be considered in this debate (healthy debate).

Lets say I am a stock broker, I want to live in Sydneys Mosman because I want to send my kids to Redlands private school, drive my Porsche to the Balmoral beach and take the ferry to work in Sydneys business district. ie. Mosman is suits my life style.

OK done deal, I want a 3br, fully renovated home in mosman. All I have to decide now is "Rent or Buy"? Being a stock broker I earn mega bucks, so finance for the $1.6M to buy the home is no problems, I also have the $400K deposit from last years bonus and $100K costs. But wait, I can rent the same house for $600pw, $28K per year as there is a glut of 3BR homes in Mosman for rent, thats a net yeild of 1.75%! If I buy I have to pay around $70K/year interest, if I rent I only have to pay $28K and the owner sucks up all the rates, repairs etc.!

So I am driving around in my Porsche thinking, the difference is $42K/year, I would be crazy to rent UNLESS I am going to enjoy capital growth. A also I am a little afraid, if I dont fork out $1.6M today, next year it will be $2.0M and I will have to contribute this years bonus as well and the new 911 GT3 is on order!

Rental returns IMHO provide a floor value to a home, the majority people will almost always choose to buy if rent is more expensive than buying.

 

[Bill.L]

Hi all,

Mikhaila, that is a very good point. In fact I think we could create a list of the gaps in LB's logic if we really tried.

1/ It is not just investors.

2/ The effect of interest rates on yields.

3/ All types property are not the same.

4/ It is a growing market(population) and just standing still is effectively going backwards.

5/ Trends have a habit of going a lot further and higher than anyone expects. Just because there has been a reduction of clearance rates at auctions, does noy mean it is the end of the boom.(we'll probably need to wait until after the autumm sales period to get a clear picture)

6/ Any takers wish to add to the list??

LB, on this thread and others similar, you and some of your supporters regard me as the out and out property bull. I would love to get your opinion on the cashbond thread where I am regarded as the doomsayer!!!

bye

 

[Bill.L]

Hi all,

AL,
If the stockbroker was going to rent instead of buy to save the $42k in your example, he would probably drive a Kia or something similar for the same reason.
Most people who choose to buy think not only of rents today, but how they will increase in the future. They also think of security of having your own place where you wont be kicked out after a year because the owner wants to redevelop. Then there is the prestige of owning something.

These are the type of things that don't fit into the purely rational ecomomists thinking as they can't be quantified.

bye

 

[see_change]

In our discussion re the Stockbroker

No one has mentioned the most important element that will determine what he does.

His Wife.

She doesn't want to live in someone elses home. She will live in HER home. If she doesn't like the decor of the Six month old 50 K kitchen , she will pay 70K ++ for the latest fashion guru to put in the latest Kitchen.

If she thinks the patio is two metres too narrow, she will pay 120k , to move the pool and have landscaping done so the garden flows better when she has her friends around to entertain them in her house.

She can't do that in a rented house.

She doesn't care about yields

See Change

 

[abcdiamond]

Hi seachange

It sounds like you have met my wife !!

Originally posted by see_change
In our discussion re the Stockbroker

No one has mentioned the most important element that will determine what he does.

His Wife.

She doesn't want to live in someone elses home. She will live in HER home. If she doesn't like the decor of the Six month old 50 K kitchen , she will pay 70K ++ for the latest fashion guru to put in the latest Kitchen.

If she thinks the patio is two metres too narrow, she will pay 120k , to move the pool and have landscaping done so the garden flows better when she has her friends around to entertain them in her house.

She can't do that in a rented house.

She doesn't care about yields

See Change

 

[see_change]

Not yet

But I've met plenty of North shore mums over the last 15 years.

When we sold nice new Pymble house in late 2001, my wife was reluctant to say the least , but she could see the logic. Now she's utterly converted.

Her friends were heard to say things like " How could you leave your nice new house " Over my dead Body ".

The husbands complain about their mortgage payments and the long hours they work.

Today my wife is closing her business, and will no longer need to work full time. She's looking at becoming an Owner builder so she can organise all the renos on our current house.

I am definitly looking foward to hearing what her friends say about that

See Change

 

[Peter 14.7]

Well at least LB gets the creative juices flowing! Having read the above it seems we are trying to answer the neverending "how long is a piece of string" .

A 20% drop is not nice in any market and I would say it is a Bubble if you are investing for three years and two years are in neg. However, if investing ten years then an overall capital gain of 50% ( 70% up and 20%) aint too bad. Note the word Capital Gain. Some would say 50% in 10 is poor but if it is +geared I want some!

LB says "a bubble can be described as a self-fulfilling reinforcing price change. Or you could also look at it as when investors seem to be buying the said asset because they are rising not because of yield."

In this description I agree.

Again I can only talk for Sydney but here most new IP virgins buy IP because they are going up! Most of the virgins would not even consider yield. Also a lot of financial advisers are doing very well thankyou from selling new units in Bankstown, Punchbowl, Central Coast, whatever. When the market "crashes" they will move on to pushing shares, trees, olive oil, ...and the economists as well.

One of the most shocking examples I know is a Sydney company promoting new townhouses in Maitland, Hunter Vallley (high growth didn't your know, failed to mention growth is housing, not population, rents, economy) to my wifes work colleague, lets call him Bob. Bob owns no home, rents big time, earns $40k and has toys WRX and Bike that means some days he cannot fill the petrol tank. Yet he got finance to buy IP in Maitland and promoter even helping with "Tips" (read Tricks) re first home buyer grant.

Why did Bob buy? He obviously didn't look at employment and income or stock of older homes nearby a lot cheaper. So why???
Because he wants the capital gain eveyone else is getting!! Bob may luck out but the fundaments on this investment are totally flawed.

IMHO if we have a bust it will have more to do with the Bobs of the game and overall confidence of the general market and less to do with the economists and graph this and that. The Tech boom was real until the bust and I remember a number of experts stating "the rules of PE ratios are changed forever". Where are they now? Saying things like "rents will never return to 4 and 5% in Sydney and always be around 2% or less as as present. This will be the new fundamental".

At this point I state I believe most of the forumites are excluded from this group of Bobs as we know our game and buy by the numbers. We also probably have deep pockets to survive a drop for a year or two. We just seem a little too touchy on attacks on our "holy grail".

But in Sydney you would have to admit it is "market confidence" and "herd mentality" has driven the rise and not fundamentals, Therefore if rates continue to go up and a new investment flavour comes along, money will go elsewhere and we will have the bubble burst here. The trick is to try to understand this "X" factor and to include this with your fundamentals when buying.

So when this morning news I hear a 41% clearance rate in Auctions Sydney I smile, bring on the "bubble collapse" real or imagined. I buy for return and fundamental safety and the sooner the Bobs are out of the way the better.

Regards
Peter 147.

 

[Sim]

Originally posted by see_change
She can't do that in a rented house.

She doesn't care about yields

She also can't do that in a unit !!!!!!!!!

What is the breakdown of investors to owner occupiers in units ? I'd hazard a guess that interest rates are going to have a much more profound impact on the unit market than in the house market.

 

[see_change]

Sorry Sim

She can. If one unit in the toaster isn't big enough .

She can buy two , and knock them into one.

See Change

 

[sbe]

This is a good, challenging thread.

Personally - I don't believe we're in a bubble - prices *should* level out a little though.

Having said that, herd mentality rules - as always.

When the herd listens to the media, gets nervous, "know a person who's been burnt", seen neg. valuations, or watched ACA/Today Tonight etc, the herd gets spooked.

Then, watch out, anyone could be trampled in the ensuing stampede to "off load and move to something safer - like stocks".

While the fundamentals are (I believe) still OK, the herd don't always analyse things logically.

Your thoughts ?

 

[Aceyducey]

Originally posted by Sim
She also can't do that in a unit !!!!!!!!!

Apart from SC's comments, you can also spend an awful lot on kitchens & bathrooms with designer fittings & whatnot in apartments

You can even spend a lot on paint & carpet/tiles if you really have more money than sense.....

Cheers,

Aceyducey

 

[Sim]

Originally posted by see_change
She can

Okay, cut the rhetoric will you, and let's keep this real. I don't think anyone would disagree that the vast bulk of units out there are not in the same class as a toaster unit, or a Kirribilli unit, or a penthouse unit somewhere.

My point was that there are literally thousands of very average units out there, with a very large proportion of them owned by investors.

Do you disagree ?

 

[brains]

A thought provoking post from Peter 147. As ive stated previously,
re LB, it sounds like a post from a professional investors point of view.

But people on this forum continue to ignore the investing fundamentals and buy on crap yields and/or say there will be no bust.

In my mind there already is one.

While im typing (which im really bad at) i'll have a quick word about Rocky. I recived some good info from See_ Change (thanks) a couple of months ago but considered i was looking to buy too late and gave it a miss.

I was a bit disapointed, thought id missed the boat, but now my opinion has changed. I think Rocky is a dud. It never got off the ground before the rise in interest rates and the slowing of the market and investors have fled the place.

Long term id consider it a bad investment except for the 9% yield but id get out now as i think its going to go south up there and 9% gross dont look too great against 7-8% interest rates and possibly negative growth in the near future.

 

[see_change]

Originally posted by Sim
Okay, cut the rhetoric will you, and let's keep this real. I don't think anyone would disagree that the vast bulk of units out there are not in the same class as a toaster unit, or a Kirribilli unit, or a penthouse unit somewhere.

First of all re your first paragraph " cut out the rhetoric ". All three examples I've quoted in this post, including the Toaster are real. They relate to people and relatives of people I know on the North Shore. They were made in the context of previous comments about a fictional stock broker and his wife.

My " She can " was also made In relation to this couple, in particular the wife.

This comments were made in the context of showing that, for some poeple, yield is irrelevant when working out the value of a property .

See Change

 

[Bill.L]

Hi all,

So much to cover as this thread develops.

Peter 147, What you state about the Bobs of the world, I do not disagree. I have often stated that I think the market is segmented, and perhaps the differences are growing!

What if Bob had bought one of those older cheaper houses you mentioned instead of the overpriced apartment??

What if he then got his act together and decided to start paying it off instead of wasting his money on all the toys???

Where would he be in 5 years time by following the above instead of continueing his current thinking??(ie before the purchase).

I think Sim is very accurate in his assesment of the differences between houses and apartments/units. The media equates investors WITH apartments/units, its as though you couldn't buy houses as an investment.

Brains, The usual course of events in country towns is sudden growth followed by years of nothing but yield increases(slowly). I see it as no different this time.(unless there is some dramatic change in the town). If Seech has bought before the sudden rise, and has positive cashflow, what's wrong with keeping the investment as it pays itself off??(I declare I have similar property, only different town). I can use the increase in equity if I like and the high yield continues to come in handy.

Seech, So the wife becomes number 6 on the list!(in my case it would be number 1!!)

bye

 

[Sim]

Originally posted by see_change
All three examples I've quoted in this post, including the Toaster are real

You're missing my point Seech.

My point was that while I agree with you that the majority (well over 60% I believe) of houses are owner occupiers who do not buy based on yields, there is a very significant percentage of units which are bought solely for investment purposes.

 

[Peter 14.7]

What if Bob had?

Dear Bill

You rightly put the other side of the coin that as an investment a PPOR for first home buyer is almost always an excellant idea.

I actually had said this to Bob many times when he lamented he could not buy into Sydney. I tried to get Bob to consider an older walk up 1 bed or studio in Kings Cross which is great suburb for cafes, lifestyle and always can let out if Bob had to return to home/move.

Unfortunately another factor of the Bob's I notice in Sydney is "the need to have it all now" Hence the WRX & Bike. PS I tried to get him to "reconsider " these as well. Bobs sadly needs to compete with his mates instead of taking the slower but sure route to success. A Unit in the X does not have "street cred".

Which brings me to another Bob sydrome "Why are many young people unwilling to compromise?"

Personally my wife and I bought our first home in 1988 for $72.5k with a $7k loan from dad with interest fixed at 13.5%. We drove wife's 73 Toyota Corona until we upgraded to a 82 Hilux Ute with AC (luxury!) years later. Now having bought and sold a few homes, did a dual occ. and having both built our careers, in 2003 we own completely our PPOR in Surry Hills Sydney worth $600K, have some IPs and Wife now drives a red Alfa Romeo 147 ( hence my tag).

I tried to tell Bob the moral of this story but he simply says "yeah but you and wife were lucky". He does not seem to equate no cost Toyotas repaired by dad with cost saving. What do your do?

On Sims comment.

Whilst I acknowlege there is money in Sydney which buys units regardless of fundamentals he is totally right to say the vast majority of the new units built are IP's.

I write from personal experience in buying units for a client in Ultimo/Pyrmont where official statistics put the investment ratio at 85%. For those looking for a bargain, if rates go up, these are suburbs to watch. Just get a strata report for defects and level of money in sinking fund, work out the BC fees ( can be huge) and find out who controls the BC votes. Often developers who sell units as IPs get the owners to sign over the BC voting rights to them. Any defects come up? They vote down a proposal to go the builder.

Regards Peter 147

 

[OPM-addict]

LB, he who hesitates is lost.

Hi all forumites,

This is a loverly post about blissful ignorance.

In the UK there is a record called the Doomday Book.

The Domesday book was commissioned in December 1085 by William the Conqueror, who invaded England in 1066. The first draft was completed in August 1086 and contained records for 13,418 settlements in the English counties south of the rivers Ribble and Tees (the border with Scotland at the time).

Briefly it has the job of recording property sales prices from its conception in 1085 to present day.
It has found RE has risen approx about 9%.

So .... THERE IS NO BUBBLE.
Recorded fact case closed.

True, there are many Bobs out there.
They buy and hold the property for a short time and then sell it for very little CG since they brought an overpriced IP intially.
They are thankful to make a little money and they can sleep easier at night since they dont have to pay those strata, council and water rates. We won't even mention the tennents or dealing with PM.

The Bob's buy what I call fast food real estate. Usually the person selling it to them are in there uniform (the Henry Kaye suit) and always offer them frys and a coke in a value meal pack (whitegoods and appliances).
Served to them all WRAPed up.

Sorry for the above analogy but its a little poetic.

My point is there will aways be LB's & Bob's out there just as RE will always rise over time.
If your looking at investing (IP and/or stocks) make a plan and adjust it to the present to be mindful of the future.

In closing, RE is a great vehicle for CG. Rental returns are usually weighed against CG and if you have both with your IP you have done well.
AND......
T H E R E I S N O B U B B L E

Respect, Peace. Out.

OPM- addict

 

[L Bernham]

OPM
I hope you notice that I've never denied that property will rise *over time*.
It doesnt stop there from being a bubble now.

Try telling some of our Asian neighbours that they had no bubble and that they must have just imagined the 50%-80% price falls because "the domesday booK" says it cant happen (according to your post).

In reality, there is a serious nationwide bubble that the Reserve bank governor has been warning us to watch for a while and since his warnings have gone unheeded he is now left with no choice but to do something about it.
It suggests to me that the huge capital growth is over because Mr Macfarlane is going to keep raising interest rates to prevent prices rising more.
What I'm saying is, with limited or negative capital gains potential an investor had better be getting a pretty good yield to make the investment worth while.
No doubt most of you are doing this but I'm still a bit concerned about first timers paying whatever the asking price is for a property they like, without thinking whether they are paying too much. Believe it or not you can pay too much for a *good* property in a good location.

cheers
LB