agreed. i would never bother buying more. i wouldn't even be on this forum
We will defy history if the bubble doesn't burst
- Thread starter Property Meister
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agreed. i would never bother buying more. i wouldn't even be on this forum
Agree....though i thought the boom ended late 2003. Then it took off again late 04. Then I thought it stopped late 07. Each time my attention turned to yield plays rather than growth.
I've spent hundreds of hours reading through fundamentals to try and better understand what has driven prices higher.....and my view is global credit expanding faster than global gdp. And that has had me concerned, because I believe that has to stop, and when it does, Steve Keen may not be as silly as permabulls wish.
Recently I've been examining the relationship between escalation in yield, growth, and holding costs; and initial yield and the rates cycle....as I believe the next 10 years will be quite different from the last.
Below are charts for an IP with the following :
purchase price : 350k
incomes : partner 1 - 80k, partner 2 - 65k
finance 80% lvr 7.5%, 20% LOC 8.25%
cpi 4%, growth 5%, initial yield 2.5%.
in costs 6%
hold costs 1.4%
cg 5%pa
rent escalation is at a rate (.33*cpi+.66*growth).
It'd take over 30 years to hit neutral cash flow after tax.
It doesn't beat cash after selling until year 16.
Anyone buying such a beast would need growth and/or rent escalation to be well in advance of 4% inflation. That's a big gamble in today's fundamentals.
I'm using fjficm's example...from his last post. 2.5% would be quite the norm in South Yarra.
I am thinking about investing again, say two more in Sydney. And I don’t have the training or smarts to understand WW graphs but I respect his is probably right.
So after applying - buy and sell to pay of PPOR, my strategy is now long term (read 25 years)- buy and hold. I see our properties as our personal superannuation. As old age creeps in and I need some cash to replace a hip or two, do a reverse mortgage, or sell one, etc..
So may I ask I right to ask really worry about one thing:
Are rents going to stay the same? And then rise?
I ask as provided rates don’t go crazy, (and it seems 8% is the new 18%), there are always renters and they seem to be growing with the attitude of some GEN Y and GEN X to rent and live it up over buy.
Coupled with the fact, one my more recent realizations is how informed and uninterested, the average people are about investment. I see ongoing strong rental demand.
Case in point: as some know I do Deprecation Schedule for Scott (aka Depreciator) and I have been frankly stunned that some Accountant and more a few Agents done even know about depreciation! How do Mr and Mrs Joe Average get smart if these guys are dumb and the reality is they don’t.
They are renters.
So I ask, with all the above does anyone see a drop in the number of tenants (demand) and hence the level of rents in the affordable, set and forget, new units and homes market?
Regards
Peter 14.7
So after applying - buy and sell to pay of PPOR, my strategy is now long term (read 25 years)- buy and hold. I see our properties as our personal superannuation. As old age creeps in and I need some cash to replace a hip or two, do a reverse mortgage, or sell one, etc..
So may I ask I right to ask really worry about one thing:
Are rents going to stay the same? And then rise?
I ask as provided rates don’t go crazy, (and it seems 8% is the new 18%), there are always renters and they seem to be growing with the attitude of some GEN Y and GEN X to rent and live it up over buy.
Coupled with the fact, one my more recent realizations is how informed and uninterested, the average people are about investment. I see ongoing strong rental demand.
Case in point: as some know I do Deprecation Schedule for Scott (aka Depreciator) and I have been frankly stunned that some Accountant and more a few Agents done even know about depreciation! How do Mr and Mrs Joe Average get smart if these guys are dumb and the reality is they don’t.
They are renters.
So I ask, with all the above does anyone see a drop in the number of tenants (demand) and hence the level of rents in the affordable, set and forget, new units and homes market?
Regards
Peter 14.7
So your concenr is values go flat or backwards, which Perth has seen.
How much backwards? And if rents go up and rates are low, will not capital value be given a floor, provided supply is still tight?
Peter
Pete, I think you want to build an extra measure of caution into your calcs from now. Regarding rent escalation, do the best due diligence you can.
- Ask multiple PMs around the areas you are interested in....
- Check official stats. Qld's RTA has good freely available databases. You can check average rise in rent and bonds lodged.
- Check SQM's very good post code level rent data.
- Start recording the number of rea.com rental listings in 1 or 2 selected burbs, as a proxy for vacancy rates. SQM does this but doesn't hurt to double check their work, and their data is at least a month behind.
Going by RTA and SQM data, rents and vacancy rates over the last few years do not support it is as simple as rental demand going up. There's a case to be made that when unemployment rises, so do vacancy rates. i.e. Sydney 2000's vacancy rate climbed significantly with GFC (and rent hikes???) and only began to descend mid2009. It's a similar story in many regions.
I tend to believe things everywhere will atleast flatten and for a long stint but we can still buy safely imo.
The crucial trick is in the buy as always but much more importantly now and only if you can comfortably hold regardless for a long time.
If we buy at 1/3 below market or less , we're covered . That's doable , that's all I ever pay , their around , as I don't believe Aussie prices this last 8 yrs , or the so called shortage and then there's the whole world thing so , that's just my opinion and so how I'm playing it .
I didn't start pre ' 2001 like a lot of people here , nothing matters for them but I started 06 , probably the worst time, so I've always been very wary of that.
But as back up I also only buy stuff I can ad to , rents & equity, I believe we're safe then which ever way things go.
Even if it's just a corner property like one of mine , a fence across the yard and a rentable bungalow thrown in . For a couple of bucks your already getting 50% more rent , and their popular b/c a lot can't afford the high rents .
Ps , actually I better add , it's not that easy I do realize that , been lots of very careful wangling on my part I know that much. But it is poss' to cover yourself and in relatively simple ways , as compared to some much more expensive and complicated methods anyway .
Cheers
The crucial trick is in the buy as always but much more importantly now and only if you can comfortably hold regardless for a long time.
If we buy at 1/3 below market or less , we're covered . That's doable , that's all I ever pay , their around , as I don't believe Aussie prices this last 8 yrs , or the so called shortage and then there's the whole world thing so , that's just my opinion and so how I'm playing it .
I didn't start pre ' 2001 like a lot of people here , nothing matters for them but I started 06 , probably the worst time, so I've always been very wary of that.
But as back up I also only buy stuff I can ad to , rents & equity, I believe we're safe then which ever way things go.
Even if it's just a corner property like one of mine , a fence across the yard and a rentable bungalow thrown in . For a couple of bucks your already getting 50% more rent , and their popular b/c a lot can't afford the high rents .
Ps , actually I better add , it's not that easy I do realize that , been lots of very careful wangling on my part I know that much. But it is poss' to cover yourself and in relatively simple ways , as compared to some much more expensive and complicated methods anyway .
Cheers
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Below are charts for an IP with the following :
purchase price : 350k
incomes : partner 1 - 80k, partner 2 - 65k
finance 80% lvr 7.5%, 20% LOC 8.25%
cpi 4%, growth 5%, initial yield 2.5%.
in costs 6%
hold costs 1.4%
cg 5%pa
rent escalation is at a rate (.33*cpi+.66*growth).
It'd take over 30 years to hit neutral cash flow after tax.
It doesn't beat cash after selling until year 16.
Anyone buying such a beast would need growth and/or rent escalation to be well in advance of 4% inflation. That's a big gamble in today's fundamentals.
WW,
What about when interest rates drop and the investor fixes it at 6% for 5 years?
Or, fixes it at 4.99% for 3 years?
Or, due to the size of their overall borrowings with one bank gets say a 1.2% pa discount off say the NAB SVR?
What if a renovation is done and maintenance expenses become close to nil for a few years, and the yield ''resets'', and vacancy levels drop?
What if due to the number of properties held with one PM, the PM fees go from 8% to 4%?
What if CG is 40% in the first year of holding?
What if rent increases 30% in the first year of holding?
What if the initial yield on a 1 bedroom apartment in South Yarra was actually closer to 5%?
What if partner 1 gets a promotion in a couple of years and is now on 200k pa?
And...... what if all of the above happens in the first 5 years?
Nice spreadsheets, but there's so many assumptions in there that I feel that it's almost useless in it's real-life application to property investing.
Lots of people may have bought property with those initial figures/%'s...... but in a given time period, things almost certainly won't eventuate according to that beautifully charted spreadsheet of yours.
I think they call this garbage in/garbage out! - but thanks for sharing anyway.
I think analysing residential property with charts like this is fraught with danger.
What if negative gearing is abolished or quarantined against rental income?
Or a land tax is introduced?
Or the economy turns nasty and wages remain flat for a couple of years whilst inflation eats away at them? (That's been the UK experience.)
Or one partner loses their job and can only get back into work on a lower salary?
Or interest rates rocket to keep inflation under control?
Or prices fall by 40%?
Some of JIT's counterexamples don't affect whether the investment is good or bad (pay rises), whilst others require an input from the owners that would cost money (renovations), or depend on fantastically good luck (30% rent increases, 40% CG in a year).
I think that WW's assumptions are a reasonable starting point, though I disagree with some of the numbers (mainly yield, which I'd expect to be closer to 4% or 5%). And I've reached similar conclusions that property investment only makes sense over a 15 to 20 year timeframe given current prices and rents.
A lot of investments only stack up if house prices continue to run ahead of inflation over the long term. I believe that's extremely optimistic. Analysing the figures (as WW has) gives a more realistic view as a starting, and if the figures stack up there then if some of JIT's suggestions come to pass then so much the better.
Or a land tax is introduced?
Or the economy turns nasty and wages remain flat for a couple of years whilst inflation eats away at them? (That's been the UK experience.)
Or one partner loses their job and can only get back into work on a lower salary?
Or interest rates rocket to keep inflation under control?
Or prices fall by 40%?
Some of JIT's counterexamples don't affect whether the investment is good or bad (pay rises), whilst others require an input from the owners that would cost money (renovations), or depend on fantastically good luck (30% rent increases, 40% CG in a year).
I think that WW's assumptions are a reasonable starting point, though I disagree with some of the numbers (mainly yield, which I'd expect to be closer to 4% or 5%). And I've reached similar conclusions that property investment only makes sense over a 15 to 20 year timeframe given current prices and rents.
A lot of investments only stack up if house prices continue to run ahead of inflation over the long term. I believe that's extremely optimistic. Analysing the figures (as WW has) gives a more realistic view as a starting, and if the figures stack up there then if some of JIT's suggestions come to pass then so much the better.
Hi Graemsay, while you're at it, why not factor in what if the sky falls down?
They abolished -ve gearing in 84. What happened?
They introduced land tax in 2002 or 2003 or one of those years. What happened?
You keep dragging in the UK example. Everyone who didn't buy a house is in the poo but those who did including my brother [not rich] and my nephews [also not rich] are far better off.
KY
They abolished -ve gearing in 84. What happened?
They introduced land tax in 2002 or 2003 or one of those years. What happened?
You keep dragging in the UK example. Everyone who didn't buy a house is in the poo but those who did including my brother [not rich] and my nephews [also not rich] are far better off.
KY
Good point, many people think they are better off spending their money on gadgets and on having a good time instead of paying off a mortgage.
Common people, get real and get your foot through a door.
It doesn't have to be the biggest and greatest place.
One day you'll be glad you did because it will be your stepping stone to a bigger and better place.
Without a stepping stone that step will be so much bigger in the future. You don't have to take my word for it.
1 word: Inflation
We used to pay $1 for a loaf of bread and it wasn't that long ago.
How much are we paying today $3?
i sold when many bought .high demand then ..i know i did the right thing
real sales tell me this not a news paper .
then i bought gold and silver.
on the bread thing price that in silver or gold over same peroid .. is a lesson in it.
rentals are everywhere in the perth and commercial the same .
what happens is put the rent up people move out ..in with mates or back home . less demand that way too .. people need to realise what is possible in rent increases. it works the same as house prices
Sunfish do you think we are following americas footsteps?
Hi Kum Lin Yau. My list of risks were intended as a counter-example to what JIT posted. I don't know if they're likely to happen, but I'd consider them all to be possibilities though I accept that a land tax or reform of negative gearing would be politically very difficult.
The UK comes up in my posts frequently because the mood in Somersoft reminds me a lot of the discussions I had there in 2007, and also that it's a good example of how things can go badly wrong.
The British housing market it weird right now. The volumes being sold are consistent with falling prices, mortgage supply is highly restricted, incomes are frozen or falling, inflation is pushing up a lot of costs right now, unemployment is (I think) rising, and the average first time buyer is now in the late thirties. Yet property prices rose by around 10% last year, during the deepest recession since the Great Depression...
But I'd agree that anyone who bought has done pretty well, though I'd probably put a cut-off date somewhere in the early noughties as being the last time it made sense to buy in the UK.
The UK comes up in my posts frequently because the mood in Somersoft reminds me a lot of the discussions I had there in 2007, and also that it's a good example of how things can go badly wrong.
The British housing market it weird right now. The volumes being sold are consistent with falling prices, mortgage supply is highly restricted, incomes are frozen or falling, inflation is pushing up a lot of costs right now, unemployment is (I think) rising, and the average first time buyer is now in the late thirties. Yet property prices rose by around 10% last year, during the deepest recession since the Great Depression...
But I'd agree that anyone who bought has done pretty well, though I'd probably put a cut-off date somewhere in the early noughties as being the last time it made sense to buy in the UK.
JIT, I think most interpret the charts for what they are, long time series 'trendlines' of passive investment. Anyone not wet behind the ears understands the smoothing, and its purpose in elaborating risk and reward.
I don't expect the next 10 years to be the same as the last, nor the same risk mitigation options to be as effective, if indeed available. Having been around for a while, it seems I prefer to cover the downside more than you. Hence my interest in exploring such things.
Maybe your investment journey has been long smooth sailing...or maybe you just have a low risk appetite. Whatever, I'm happy for you and like mindeds to build a portfolio from today, of 2.5% yielders. The rest of us can only benefit from such.
Nevertheless, I just spent a weekend at a Reno Kings property workshop and Rob Balanda and half a dozen attendees and myself shared personal anecdotes of how we'd all been burnt, and how to best avoid it in the future.....So here's to having the courage to have a go, and not being burnt....
