What happens when markets turn?

[Jboz]

Hi,

Being new to the property game, I was wondering what experienced Investors have seen in the past during times when the property market turns. I'm interested in all factors.

I'm just curious as to what happens in the past, is it storm of bad news. e.g. higher interest rates, low rental yields, high unemployment all at once? or is this less likely to happen.
During downturns, which properties tend to drop the most A,B or C Grade? Near CBD or far from CBD?
Reading some posts make it seem like it will be bad, but has it really been bad in the past for Sydney anyway? Or is it generally flat for 10 years?

I ask this as I'm keen to get into the Sydney market with a long term hold view (I know most people here don't recommend it but I'm not comfortable investing in another state since it will be my first IP and not sure if I want to wait 10 years to jump in) and just want to prepare myself with buffers so that I do not overcommit so I am still able purchase another property when the market turns.

Apologies in advanced as I know it may sound like I may be all wrong but that's why I thought I'd ask here to get a better understanding.

Thanks

 

[Ausprop]

at least you are going in with your eyes open. when the market turns it will be all over the place, don't believe people that tell you'oh the rich won't cut their prices' or 'the bottom of themarket is immune' etc. The last correction in Perth wiped off 25-40% of values. If buying at the peak I think you should brace yourself to endure at least 20% write off, which if leveraging at 80% means it's a no go zone

 

[windyzz]

Hi,

Being new to the property game, I was wondering what experienced Investors have seen in the past during times when the property market turns. I'm interested in all factors.

I'm just curious as to what happens in the past, is it storm of bad news. e.g. higher interest rates, low rental yields, high unemployment all at once? or is this less likely to happen.
During downturns, which properties tend to drop the most A,B or C Grade? Near CBD or far from CBD?
Reading some posts make it seem like it will be bad, but has it really been bad in the past for Sydney anyway? Or is it generally flat for 10 years?

I ask this as I'm keen to get into the Sydney market with a long term hold view (I know most people here don't recommend it but I'm not comfortable investing in another state since it will be my first IP and not sure if I want to wait 10 years to jump in) and just want to prepare myself with buffers so that I do not overcommit so I am still able purchase another property when the market turns.

Apologies in advanced as I know it may sound like I may be all wrong but that's why I thought I'd ask here to get a better understanding.

Thanks

My best advice is don't buy any Off the plan in Sydney now...
And secondly if you're planning to buy and hold for a long term, you should look at how you can service your debt or negative cash flow when interest rate rises.

Also study the area and look at the demand vs supply. Look at all future infrastructure, population growth and possible job creation.

Avoid area that are being rezone for high density (i.e. high rise).

Go to open houses every week and auction to determine the demand and look at the number of stock available on the market.

Look at rental vacancies rate in that area, and yields.

I have bought recently in Sydney and after extensive research on the area I'm confident that the growth will be very strong in years to come, this is due to strong population growth , new infrastructure, and job creation and most importantly a very limited supply.

 

[Shadow]

ABS housing finance approvals will fall first, then auction clearance rates, then prices.

If Sydney gets a supply glut as it did by the end of the 2003 boom, then rental vacancy rates will rise too (they hit 4.5% in 2003).

Those are the the three main indicators for me... if housing finance and clearance rates tumble, or vacancy rates spike, it's time to be wary.

 

[marg4000]

In my experience unemployment is the biggie.

As long as a person has a job then he/she will do everything possible to hang on to the house.

Next is interest rate rises. Not the piddling .25% changes we have seen in the past few years, but up to 2% at one time that we endured back in the 1970s and 1980s.
Marg

 

[Deltaberry]

During downturns, which properties tend to drop the most A,B or C Grade? Near CBD or far from CBD?

In my opinion, probably suburbs with debt.

Fringe suburbs, FHO suburbs definitely
But also wealthy suburbs (eg $4m+) where bankers, lawyers, mining consultants have taken on huge debt to finance nice houses

I think the safe places would be traditional areas, where most houses are paid off. Another safe one is presumably AAA buildings. Debt-free moguls aren't going to sell Pitt St properties in a crash.

 

[Ausprop]

Another safe one is presumably AAA buildings. Debt-free moguls aren't going to sell Pitt St properties in a crash.

not so sure about that, most of them are hocked to the back teeth, look at Centro

 

[sash]

Well...a lot of people loose their shirts....or underwear...

 

[wombat777]

If Sydney gets a supply glut as it did by the end of the 2003 boom, then rental vacancy rates will rise too (they hit 4.5% in 2003).

Was this 4.5% across the Sydney rental market or the peak in particular suburbs or areas?

 

[Deltaberry]

not so sure about that, most of them are hocked to the back teeth, look at Centro

Some of them. Jewish for example.

 

[BayView]

What I've noticed when markets turn is;

1. Lower end housing; mostly O/O's and a few investors. These houses are not affected as much because they are where folks live, not much debt and often the yields for investors are better, so they don't need to sell as often.

2. Middle housing; much the same as above, but usually a bit more variation. Obviously; more risk, but still not too bad for safety if the property is a good one in a good location.

3. Top end; many of these houses are bought by folks who can afford them; not necessarily what they are worth.

In lean times when high-end income earners are scaled back etc, many of these houses have debt attached and have to be sold in a hurry, and the pool of buyers at this end is much smaller; so often times the drops are bigger in order to sell in a timely manner...for those able to play the game at this level it is a great time to buy. This level can also see big and rapid gains in good times.The most volatile of the 3 levels.

If you are wanting to dip your toes for the first time; the recommended entry is for existing stock in a solid area, a good location, good floorplan and built after 1987 to maximize tax deductions for cashflow.

The majority of renters in life are at the lower end, and they all want to live somewhere decent and affordable. This criteria will give you best protection against price fluctuations and rental vacancies.

 

[vaughan]

What I've noticed when markets turn is;

1. Lower end housing; mostly O/O's and a few investors. These houses are not affected as much because they are where folks live, not much debt and often the yields for investors are better, so they don't need to sell as often.

Postcode 2770 has gone crazy, and "investors" are paying stupid money for houses that have gone up in value 50% in the last 3 years while rent return has softened and vacancy is increasing. They were great buying in 2011 for the yield and CG potential back then (which eventuates sooner than even the most optimistic expected) but imho they offer neither now. These will be the people to feel it the most when the rates rise.

 

[windyzz]

What I've noticed when markets turn is;

1. Lower end housing; mostly O/O's and a few investors. These houses are not affected as much because they are where folks live, not much debt and often the yields for investors are better, so they don't need to sell as often.

2. Middle housing; much the same as above, but usually a bit more variation. Obviously; more risk, but still not too bad for safety if the property is a good one in a good location.

3. Top end; many of these houses are bought by folks who can afford them; not necessarily what they are worth.

In lean times when high-end income earners are scaled back etc, many of these houses have debt attached and have to be sold in a hurry, and the pool of buyers at this end is much smaller; so often times the drops are bigger in order to sell in a timely manner...for those able to play the game at this level it is a great time to buy. This level can also see big and rapid gains in good times.The most volatile of the 3 levels.

If you are wanting to dip your toes for the first time; the recommended entry is for existing stock in a solid area, a good location, good floorplan and built after 1987 to maximize tax deductions for cashflow.

The majority of renters in life are at the lower end, and they all want to live somewhere decent and affordable. This criteria will give you best protection against price fluctuations and rental vacancies.

Correct, Top end of the market is probably the most volatile IMO.

Also looking at the Bottom end of the market (i.e some regional area) is probably come after the Top end of the market in term of volatility, where most of the ownerships are Investors chasing after high yield.

The Middle of the Market is the safest bet. This is where majority of home owner purchase to live, and most will do anything to keep their home.

 

[BayView]

Postcode 2770 has gone crazy, and "investors" are paying stupid money for houses that have gone up in value 50% in the last 3 years while rent return has softened and vacancy is increasing. They were great buying in 2011 for the yield and CG potential back then (which eventuates sooner than even the most optimistic expected) but imho they offer neither now. These will be the people to feel it the most when the rates rise.

Yes, there are some areas where rental yields are high enough that will attract more investors until the yields get swallowed up by rising prices.

I remember buying in Kalgoorlie years ago, and the yields were ~9% at that time.

Within a couple of years the prices had gone up and the yields were back to about "average".

Same thing happened in Tassie a few years ago too.

But generally; year in and year out - this is the price range to be in for the new player, I believe. The more established suburbs are probably the best bet for the newbie - less speculative, less risk, but the returns are not necessarily as good either.

Depends on your income too; if you are a high income earner; the whole game is a doddle, and you can throw money at a lot more stuff and it won't hurt the pocket.

 

[k88k]

Sorry maybe a different topic, but when markets do turn (for the worse)...

How much do the SS community have as a buffer, to cover for any loss if or when they do occur???

ATM I have $20k in the offset.

ATM I continuing to put more into, recently save another $10k from my salary.

So there's $30k there. I note it depends on many variables, ie loan amount, lvr,etc.

So do you the SS community, have say 12mths worth of rent payments as the buffer?

Thanks,
K

 

[MTR]

In my opinion, probably suburbs with debt.

Fringe suburbs, FHO suburbs definitely
But also wealthy suburbs (eg $4m+) where bankers, lawyers, mining consultants have taken on huge debt to finance nice houses

I think the safe places would be traditional areas, where most houses are paid off. Another safe one is presumably AAA buildings. Debt-free moguls aren't going to sell Pitt St properties in a crash.

From my experience nothing is safe when markets crash, blue chip falls just as hard and longer way to go.

MTR

 

[see_change]

We always have a good buffer . We stop buying well before peaks so we know there's an in built buffer . Last Sydney buy in late 2013

When the market turned / slowed down last time , I sat back , relaxed and concentrated on doing other things , while keeping an eye on what was happening .

I think our last buy in the previous cycle was in 2004 . After that we did a development in Wahroonga on a place we bought in 2001 . While we did well with that , it did mean we didn't buy in WA in places like Geraldton .

Next buy was about a month after the GFC hit . The place that was getting all the publicity in Sydney about crashing prices so we looked in the neutral bay to Mosman area . My only regret is we didn't buy more then eg the two bedder in karaba rd neutral bay with harbour views and an oversized garage for around 520 .... That was another first day looking regret .

Cliff

 

[windyzz]

Seriously how can anyone predict a GFC ?!?!?!?! Westpac predicting that Our economic should be recovering by the end of 2015. If you know GFC is coming or as predicted by R.Kiyosaki a "world deflation", might as well sell everything now and just cashed everything up ?

Who knows your property might only worth 5-10% of the current value next year right ?

 

[Shadow]

Was this 4.5% across the Sydney rental market or the peak in particular suburbs or areas?

It was across Sydney on average...

 

[sash]

Yes...this is when Boganaires....become Boganrupts.

Postcode 2770 has gone crazy, and "investors" are paying stupid money for houses that have gone up in value 50% in the last 3 years while rent return has softened and vacancy is increasing. They were great buying in 2011 for the yield and CG potential back then (which eventuates sooner than even the most optimistic expected) but imho they offer neither now. These will be the people to feel it the most when the rates rise.