Hmm…your statement seems to imply that people who put money into property do not focus on potential cash flows, or that "the value of their investment will go up as the potential future cash flow improves". Historically at least (emphasis on the word "historically"), house prices have risen and rents have similarly also risen. Yet the size of the loan that a buyer draws down for the purchase of a house stays the same (unless they refinance). Therefore, their cash flow actually does improve. So how can we conclude that people who buy property are actually speculating? Is the POTENTIAL for cash flow there? Certainly it is.

Furthermore, why is there the assumption that people are "happy to lose money and get a tax deduction"? IMHO, the deductiblity of a loss from a property venture is icing on the cake. No wise man on Earth has ever advocated buying property for the sake of making a loss so they can reduce their tax. This is counterproductive. Sure, you reduce your tax, but you also reduce your effective income (even if, because of the tax deductibility, your effective spending power is actually increased). For some folk on the very highest tax bracket, they might see a temptation to do it because their tax appears lower each year, plus they have an asset that historically (again, emphasis on 'historically') has grown in value and this growth is not taxable unless the owner decides to sell and take profit, in which case there is CGT.

Finally, how do we predict what the "underlying profitability of the venture is"? Based on historical (once more, emphasis on the word 'historical') performance of course. Historical performance is not an indication of future performance. But would it be more reasonable to predict the occurrence of an event based on what has happened historically, or what has yet to happen in the future? Hence, property buyers ride on the information that they DO have, believe the venture to be profitable, and hence put money into it with the expectation of a return. So, just to add more fuel to the fire, who is to say that property prices will not trend upwards indefinitely and property purchasing becomes a very unwise venture?

Of course. But what I meant was, how do their economies compare to ours? What is their level of supply and demand? What about population growth or decline? What about their rates of employment and unemployment?

To be realistic, we'll have to entertain this possibility. It would be foolish to say that certain things would NEVER happen. However, this is a bold statement. We're talking about today's $500K house going on sale at $300K, and a finer $1.4 million house selling at $840K. If we're talking about a 40% decline in property prices across the entire board, regardless of location, then this is something I'd like to personally witness. It would take a big hit to our economy to see a drop of this magnitude. That is, Australia has to become horridly unpopular as a place to call home.

It is conceivable that prices in mortgage belts (or places with a large proportion of investors as opposed to a strongly owner-occupied area) could take a huge tumble when these owners default under high interest rate conditions and unemployment, but for the people with greater holding power who control property that is well-located, a downtrend in the market would probably cause such owners to hold back from even selling. Stock will thin out, and maybe till the point that nothing goes on sale such that it does not matter even if there buyers.There would simply be no willing sellers. My opinion is that for the most part, people would rather grit their teeth and hang on rather than sell out and still be stuck with no place to live.

Seriously, if I had, for example, an opulent mansion fronting the sea in a thriving area that is such a joy to live in, I have no reason to sell up even if prices dropped. If I did, where else could I buy? EVERYTHING else would have similarly dropped by 40%. I do not wish to downgrade by buying into some landlocked area. And if I want to upgrade, it would still require an additional outlay of cash. If that's the case, I'd rather stay put.

Therefore, when prices do take a tumble, the properties that are desirable to EVERYONE who wants to buy in are still going to remain in demand, are going to be in extremely short supply because the vast majority of owners will choose not to sell. At the end of the day, the doom & gloom folk will be left complaining about unaffordable housing all over again because they cannot buy into an area which they had never been able to afford in the first place.

And we can be well-assured that in the environment of a property crash, no bank will, in its right mind, loan money to people to buy property. This is assuming the banks haven't already gone out of business and thrown the rest of the economy into turmoil by winding up and taking people's savings and deposits with them. IMHO, a property crash does not solve the problem of home ownership. So unless you have an individual (or family unit) that is cashed up enough to put up $300K in cold hard cash for an average house in Melbourne during the purported crash, the prospect of home ownership will not get any better for these folk. Even if they can, they will still be lamenting about that beautiful $840K house (once $1.4 million), well-located in a wonderful environment, but is is still so unaffordable.

When we talk about 'perceived value', shouldn't we perhaps ponder over the 'perceived value' of money itself? After all, are sheets of plastic and bits of metal really worth that much?

It might boil down to supply and demand. If people continue to want to live in certain areas, the prices there will probably rise. For example, I'm unlikely to give up a house by the beach even if the price dropped a great deal. Why? Because I want to live there.

There is a perception by some that land, being mere pieces of dirt, shouldn't be worth much money. The key issue that is often missed in these instances however, is where this piece of dirt is located. This piece of dirt on which people live on directly impacts the quality of their lifestyle. A comparison between extremes will bring this to light: a pieces of dirt in the middle of a polluted industrial hub versus a piece of dirt of the same size but located fronting the beach. Which would people prefer?

It's the preferences that drives the prices. These preferences are deeply ingrained into most of us, and it explains why people would gravitate towards certain locations, and it probably also explains why the vast majority of us prefer to sit in an empty row of seas on the bus rather than share it with someone else. Human nature is an interesting thing.

EDIT: OOPS, the perceived value of money was an issue already mentioned before me. Pardon the repeat. It was purely coincidental, I promise.

Fair enough. People love to blow things out of proportion and indulge in sensational material (and this applies to both sides of the story). This is the exact same thing I've been told, and in all honesty it weighed in heavily in my decision to buy something. However, is there some truth in them saying that property prices will always go up? Perhaps. Inflation alone will push property prices upwards. The demand for limited space in 'trendy' or desirable areas will always be there. Will supply necessarily increase to keep up with that demand? Perhaps not.

If someone owns a block of land in a fabulous area, can you force them out of their pad, pull down their house and then build apartments for those who want to move in? Maybe, but only if you start a war and win, or if the country were extremely corrupt and things were in absolute disarray.

But let's take a step back and look at the concept again: action vs inaction.

What is the likely consequence of people claiming that property prices will ALWAYS go up? It is likely that, playing on people's fears, it will force people into action to buy, which then becomes a self-fulfilling prophecy that drives prices up. This is directly beneficial to the people who own property and proclaim that THEIR investment always increases in value.

What then, is the likely consequence of people claiming that property prices are overvalued and set to tumble to the order of 40%? If anybody thinks this will directly cause a crash and drive property prices down, then speak now. If, on the other hand, they agree that simply talking about a crash doesn't bring on a crash, then I rest my case.

Honestly, people can only attempt to predict the future based on what has happened in the past. It is because of this that I believe people consciously or subconsciously make certain decisions in life, or place bets, if you like. For example, if I was fined for running a red light in the past, I would clearly try to avoid doing it again. I'm not going to run that red light by betting I won't be caught this time around! If, however, I had run several red lights in the past and was never fined, I would bet on not ever being caught.

It is impossible to predict if a property crash will occur. It just seems easier to make bets on what is likely to occur, based on what has happened in the past.

Good point. I'm not trying to sell a house for double the price now (instead of 10 years time) because nobody would believe me. That is exactly the same reason why you're not hopping down to your next OFI and dropping in an offer that's 40% less than the asking price. But am I sitting around whinging that nobody believes my house will be worth double the amount in 10 years? No! I'm going to wait and prove myself right, and then I'll be laughing all the way to the bank. If my predictions were wrong, no big deal. I never publicly declared my beliefs so there's no chance I'd be embarrassed. And all the doomsayers should do the same: bide their time and wait for time to prove them right (or wrong).

And regardless of what happens to house prices, I'm just happy to have a house I can eventually move into and call my own. What emotional value do people put on a place they can call their own and nobody can remove them from their place of residence? Very high I presume. Hence the concept of the Great Australian Dream.

However the bottom-line I've been hinting at all this while is that, as with everything in life, there are two choices: action or inaction. We can choose to be proactive and take actions to have a chance to control the situation to steer it in a direction that is favourable to us, or we can just sit around and mope, which achieves nothing. For example, me complaining that a Ferrari is so expensive doesn't ensure that I can buy it at a lower price. What I should be doing is to find means to either save up more, hunt around till I find someone willing to sell it to me at a price I am willing to pay, or otherwise stick to driving my Corolla.

In property market terms, offer the vendor an amount for a property that you believe is fair value and see what the response is. If the vendor declines your offer and you think the house is too expensive, then look elsewhere and keep looking till you find something you're happy to pay for. This is like teaching people to suck eggs of course, because this is exactly what people should be doing whenever they're buying something that has a price which is negotiable.

Sorry, just to clarify, do you mean the government has no power to force people to buy property in a falling market? The government has no power to force people to spend on anything. We are experiencing first-hand the effects of interest rate rises – the slow-down of retail and cutbacks on discretionary spending, people spending their money overseas on vacations or shopping online. There is a current complaint about how online shoppers are evading import taxes by purchasing in this manner (based on the limited amount I've read anyway). In reality, the real problem is the strength of the AUD. There will be fewer people willing to take a vacation here or send their kids here to study. Other nations would prefer to buy their products from elsewhere to avoid the costs associated with currency exchange.

Doesn't matter. If the property market does crash, virtually none of these guys will buy property because they will be too afraid. Or their perpetual mind-set that property is overpriced will continue to hinder their every decision to buy a house unless they get themselves into gear and start moving fowards. More likely, they will simply take joy in seeing they were right in predicting the crash. Or perhaps they'll be too busy predicting that prices will tumble another 40% and wait on the sidelines to buy. Furthermore, no bank in their right mind would loan money for property purchases to the people who need it most. In this case, a property crash doesn't necessarily bode well for those who dream of owning a house.

Let's say an average house in Melbourne that's currently worth $500K tumbles 40% to be worth $300K in the next number of years. The vast majority of working folk will NOT have this in cold hard cash to buy a property outright. They will NEED to take a loan from banks that will be absolutely unwilling to lend or are in the process of going out of business while the entire Aussie economy is in turmoil.

How many INDIVIDUALS here under the age of 30 (ie. Gen Ys, the people trying their hardest to move out of home, or who have already done so and don't yet own a house) actually have $300K of their own CASH sitting in their accounts accruing interest? I'd like to see a show of hands! If you do, very good, you are either a good saver, have an incredible job that pays you well each year (in which case, be thankful), or you came upon an inheritance.

A property crash is like a kiss of death to the dream of home ownership, not the solution to the problems that would-be buyers actually face.

In Singapore, I've observed this as a means of improving the prospects of home ownership: government subsidised housing. The government owns blocks and blocks comprised of hundreds of thousands of shoebox apartments that are sold direct to the public and on a 99-year leasehold (ie. at the end of that 99 years, the property goes back into the hands of the government and if you're left holding the hot potato at that time, it's value goes to zero and you get no compensation). The process is means-tested so that only select people will be successful in their application. Those who don't qualify have to buy these same apartments from private sellers who are on-selling them in order to upgrade to something else. And prices on the private market are some 30-50% more than government pricing.

These shoebox apartments are considerably less expensive compared to other private housing. They can be priced in the $300-400K range (in the 'suburbs') compared with a small terrace house in the 'suburbs' that fetch over $1.8 million. In Singapore's 'inner-city' areas, you could triple or even quadruple those prices. If the government in Australia is intent on adopting a similar strategy, they better get building now and build fast, like there's no tomorrow. But let's consider those prices for a minute. A shoebox apartment in Singapore costs $300K when in Australia you could get a nice detached house on a big block of land for that price. Is Australian property really overpriced?

Even if it is the solution to the problem, but at what cost? This is akin to saying we should proceed with genocide so that we can boast of being a people united by one law or one religion. The solution to unaffordable housing is not a crash or a recession. The solution is increasing supply, using government subsidised housing as suggested above.

That's good. We agree that home ownership is something to be earned, not something given to us as a 'right'. Actually, the rent range of the $200K house I mentioned is closer to $180-260 pw (conservatively). What I was trying to prove however, is that for the people complaining about sky-high rents, there is a solution: buy a $200K house and pay it off on a 30-year P&I loan. For 30 years you will have a roof over your head that nobody can take away from you, and at the end of 30 years (or even less if you're able to pay off faster), you have a house that is unencumbered and entirely yours.

Haha, no, my point on investors losing money is not to highlight that property is over-priced. If that's how you interpret it, well and good, your opinion is as valuable as mine. What I meant to prove was that landlords are not out there to squeeze tenants for every drop of their blood and to house them up in shonky living conditions. Where would renters be without our generous, loss-making landlords and the 'over-priced' housing they own? Do we seriously believe the govenment is going to provide loss-making property for us to live in?

The vast majority of these landlords are renting these houses out with the intention of moving in eventually. There is a growing number of disciplined young folk who have taken to buying their 'dream house', not to stay in it immediately, but to rent it out while they are still living with their parents, or while they are renting cheaply with a bunch of other mates. Hence, these small-time landlords are about to prove to all of us what 'delayed gratification' really means – giving up the thought of buying life's luxuries now in exchange for a luxury that few people of their age would eventually have.

Truth of the matter is that a large proportion of these young folk would rather move out early, party at the clubs twice a week, mope about high house prices and then go out and buy a sports motorbike when their parents already gave them a car, or even buy a $3000 bomb and spend another $5000 tarting it up so it sounds like a sports car, or otherwise spend hundreds of dollars a month smoking, drinking, buying hair extensions and makeup or on a gym membership that they do not even use!

So going back to the most important point in all of this: we have to choose between action and inaction. If we want to be inactive, then stop complaining and be happy with what we have. If we want to actively control what happens in our lives, then similarly stop talking and get cracking!

A real life example is that of a colleague and myself: both of us knew we would not be able to afford a house if we stayed at our current workplace, which we dearly loved and had worked for over 3 years, BTW. So we stepped out of the comfort zone, are now working in new places, having to learn all the ropes again and build friendships and rapport with both colleagues and clients from scratch. My traveling time to work has also doubled (and for my friend, more than tripled). In exchange for this inconvenience we are drawing higher salaries which we know will put us well on the way to securing a house.

Progress was never achieved through inaction. And inaction is like quicksand. The longer you stand in it, the deeper you get and the harder it is to get out.

NEWSFLASH: To all the folk who believe that property prices will tumble 40% – prove it! Go to your nearest open-for-inspection tomorrow and drop in an offer at 40% less than the asking price, together with all your documentation that supports your theory.

Who knows? The vendor might accept!

It's been said before: talk is cheap. There are people out there who believe property prices will go in cycles but trend upwards and they're betting their entire portfolios on it. In essence, they walk the talk, and you should too. So, if you're betting property prices will fall, then put in a reduced offer that reflects what YOU believe to be true market value. Stop talking and get with the program!

BTW, if property prices tumble 40%, you can drop me a line and I might just be distressed enough to sell at a 50% discount to current values. But hey, you gotta get in line and get in quick!

Whoa, if you could tell me where these properties are, I'd be staying away from them. Even if there is money to be made, some things are just not worth the added stress. Just when I was thinking my job could give me an aneurysm, geez.

Importantly, do you believe in the Residex estimate based on what you know about other properties for sale in the area, and recent sale prices? Would you consider putting in a lower offer instead of paying the full asking price?

DWolfe wrote:

Property development is not 9-5! So I can make time if I am passionate about something

Yep totally slack, I should be a billionaire by now lol.

D

Yeah, REAL investors don't frequent these forums on a regular basis. Get out there and get cracking!!

Wynyard, I tried dropping you a private message but found you were not accepting any of those. I noticed that you wanted to go coastal eventually and from what I understand, you can get a loan of $350K and have around $25K of savings? If this is the case, be very careful about taking the full loan of $350K from the bank, even if they're happy to approve that amount for you. If you buy a house with a loan at this level you would probably also be looking at lender's mortgage insurance, which you wouldn't be able to recoup in the immediate future, at least until you sell the house, I believe. Have you tried looking for a mortgage broker to help with your choice of loans? I have a contact, if you're interested.

I assume you're living in or around Melbourne at the moment and would rather buy than rent? Have you considered any of the suburbs around Geelong? For example, there's North Geelong (median price $273K) and Norlane (median price $189K). In the latter case, there are definitely 3 bedroom houses on the market for under $200K or just a little bit more. Look for something near the train station, so that you can easily catch a train to the city if you're working in that area.

These might not be the prettiest suburbs of coastal Geelong, however they're not all that far from Geelong 'CBD', where you might also be able to find a job. Both suburbs have recorded an average of 10% growth per annum over the last decade, so you wouldn't be buying an absolute dump that doesn't appreciate in price over the years. Of course, to 'escape' from it all, you could always hop back on the train down towards Geelong itself and then have picnics or walks along the beach. If you're the coastal sort of person, this would be very invigorating. I lived in a landlocked suburb myself but thoroughly enjoy driving for more than an hour and a half down to Geelong's waterfront. The sea just makes me feel alive and the atmosphere there is just magnificent. There's also St Helens park and Rippleside Park that you could visit, which are even nearer to Norlane/ North Geelong.

If you borrow say, the full $200K and get a fixed rate of 7% interest-only payments for 3 years (which you can get at ANZ for example), your loan repayments per year would be roughly $14000. Would this level of loan repayments be affordable for your family? Also, when buying any property, leave a buffer of about 6% of the purchase price for other closing costs such as stamp duty, conveyancing, pest/ building inspection etc. The reason why I suggest a fixed loan is because rates are likely to go higher in no time at all, and 7% is not dramatically higher than the 6.88% you were offered by CBA. Bear in mind that you might also quality for first home owner's grant of $7K…not sure if it's any more if you buy existing regional properties but check it out.

Moreover, if you're going to be sensitive to rate rises, better to fix and be able to sleep better at night. The drawback is that you won't have an offset account with a fixed rate and any spare cash you do have left over would then accrue interest that is then taxable.

Another key issue is that a Uni degree is NOT always a plus point for employment. It may open up some avenues for employment but with the major HECS debt, that can be a bit of a setback. Would HECS debt affect how much you can borrow and put added pressure on your loan repayments? People here who work in the trades who do very well and you don't need a Uni degree for that.

On the other hand, there are people like my colleagues who spend 5 years in Uni doing an expensive course (a la veterinary science), wind up with a massive HECS debt, and then start on a wage of less than $40K per annum in a stressful job (with high suicide rates) that doesn't even pay an amount commiserate with the level of skill expected. I'm not encouraging you to drop out of Uni, but if you can find something more lucrative that you enjoy doing, and can get the job without a degree, then just do it.

I congratulate you on taking steps to look for your first home.

PS: And oh, one last thing. Can you find a close, like-minded friend (from Uni or otherwise) who would be interested in buying a similar priced house to yours and live in roughly the same area? Then you each buy a house, and rent out to each other (that is you live in his/ her house and he/ she lives in yours). Each of your rents helps your friend pay off their mortgage. If there's any shortfall against costs of running the house, each of you offsets that against your income to get some tax benefits. Have a think about it.

Good day folks, great to see people are active in the property scene and also have much of a life outside of property. In case anyone would be interested to read this, here's my short story:

Currently two months into a new job and things are settling down a little after what was a very busy time last year. In 2010 I moved out of my place in Melbourne's outer-east after being there for 7 months, turned it to an IP and now staying with parents (ie. back to square one). This IP was rented to a friend for 6 months before I found other tenants in November. I also successfully completed a year-long correspondence course in veterinary behavioural medicine which has proved invaluable in my career, even if it didn't raise employment prospects all that much.

On 18 December 2010, the weekend before Christmas, I bought myself the best Christmas present ever. sinking further into debt by getting another IP in Geelong. Settlement is due only in March but we're getting a tenant in ahead of time. Both properties have given me some headache and stress since the beginning of time, which just adds to the top of whatever stress there is at work. But as they say, no pain, no gain.

They also stretch my 'decision muscles' and have forced me to grow up, and do so quickly. Considering nobody in my family has ever had investment property in Australia before, a lot of decisions had to be made on a 'try and see' approach. There was really nobody to ask, even if my parents were willing to help as much as possible.

In essence then, being fully committed, 2011 will be a more quiet year, a year spent focused on my tenants (keeping them happy and hopefully keeping them long-term), getting more competent in a new workplace, finding time for photography (once a big hobby that nearly died out with the advent of work and property purchases), spending time with parents, and hopefully finding a like-minded girlfriend to subsequently marry and share my debt with (only joking).

And of course, I'm waiting for that property market crash that so many are talking about. But as you can see, I'm betting big. I'm betting my property portfolio and financial future that there is NO bubble to burst.