To apply a stock trading principle; never buy stock that is falling in price. Wait for the bottom, wait for the confirmation that the price is rising, that is the trigger to get back in.
However, if your strategy is long term then buy anytime so long as the deal is right and you factor in an interest rate 1-2% higher than the current rate.
Prediction: The RBA will NOT increase rates on Wednesday. Exports are struggling and higher rates will drive up the dollar thus making exports worse. There are signs that the property market is weakening, particularly in the middle of prime trading season. This is what the RBA wants. Election is coming up so political pressure against rate rise will be immense. The only stumbling block is discretionary consumer debt, it’s bad and getting worse. Christmas won’t help. The RBA will tighten in January.
On margin calls on property. I believe that it can happen, but it is probably the last thing the banks want to do! Not worth the expense or publicity unless the risk is substantial (BTW: I don’t work for a bank). So long as you keep up your payments, don’t make yourself a pain to them, all should be well…unless there is a major property crash!! Part of this is, of course, is to not let the bank know what the current value of your property is!! Refinancing/reorganising your loan may do this though.
Finally, Peter J Daniels sounds pretty wise.. the question is “How do you know if it is the wrong thing?” [
]Stephen Back
Opacity Design – Your next generation website begins here –> http://www.opacity.com.auLet’s take a break from caution and over conservative attitudes to investing, guys! The RBA, in spite of the effect on exports and the looming election, may well continue to increase interest rates. Australia is running at a deficit. One good way to attract capital – to make it more attractive to save than to consume – is to increase interest rates.
I don’t think the Blackburn house Steve mentioned is a good indication that prices are falling much, in spite of the 15% price fall in that particular instance. I suspect this is more a case of the owners hoping for more and being persuaded to list at the higher price by the original agent. Agents will tell you anything to get a listing. We have recently had a similar experience, where the second agent sold our house for $30K less than the original agent estimated. The first agent did nothing for 3 months; the second agent sold it in 8 days.
To me, in comparison with the other investment opportunities out there, Steve’s approach seems a bit too conservative. As I understood his rule of thumb, it was basically if you buy it for $50K, rent it out for $90 – $100 a week. I think even $60 – 70 a week would be a reasonable return at that price. What else could you do with the money? Spend it (fun, but a zero return) or “invest” in the share market (welcome to the land of either non existent or fairly pathetic yields. Blue chip shares which return less than your savings account interest) or put it in the bank (returns 4-5% per annum at the moment).
You can buy a two bedroom flat in inner city Melbourne for less than $200K. Sure, it might only rent for $230 a week, but if you borrow 75% that’s enough for the tenant to pay off some of the principal as well as the interest. And in 20 years time, thanks to the help of your tenants, plus some cash you may have had to invest, it’s all yours. In a worst case scenario, in 20 years time your flat would only be worth what you paid for it. Don’t dream the nightmare – IT’S NOT GOING TO HAPPEN.
In the last 20 years there have been periods when interest rates have been as high as 17% p.a. And the returns on property have been spectacular. The Eastern seaboard, and probably the capital cities too eventually follow the Sydney property market. So if you want to know what your two bedroom Footscray unit will be worth in ten years time, take a look at Stanmore or Erskineville prices now. Relax, people! Take a chance and go and buy your property. In 20 years time, you’ll be 40 or 50 years old, with an independent income.
Kat
Essentially I agree that a rise in interest rates could see the booming property market plateau. I have seen Hobart properties double in value in 2 years. 1 year on, prices have risen continued to rise another 50%.
As for the value of property value declining, my opinion is that prices may reduce a small amount, however, I don’t believe that we will see significant reductions in price as new property owners will see the value of there property at a similar level to when they originally purchased, and won’t tolerate an enormous loss. When the market reverts to a buyers market once again, the source of the property bargains will come from the vendors who need to sell a property quickly.
For those selling the property value should be reasonably stable, however the time to sell a property will increase. Don’t let RE agents bully you into reducing the price to offload the property quickly. It’s your decision, not theirs. Make the RE agents do the work they are no longer accustomed to.
Cheers
MarcusI have found over the last couple of months some exceptional bargains. But also some I wanted were snapped up before the ink was dry on the sale add. I had started to buy “high end” properties but the rental return is not equivalent to a number of “low to medium” properties. I fixed 8 ip before the rise, left 3 which have now gone up to 6.45%. And have a number freehold. The reason for this is the fixed ones I can’t theoretically touch for 4 years, but the 3 I am ready to sell in a heartbeat to re-purchase another bargain or to wrap and then re finance. My rents are all pcf. Lucky with great tenants.[
]Forgot to mention, as a point of interest…….
my bank has changed it’s serviceability to 70%, plus they will only accept an annual valuation on properties, which you are stuck with for twelve months and will now only look at each property on its merits.
I manouvered a “total amount to borrow” figure before the interest rise, which is available only for three months ( you have to use it in three months or go back to the drawing board, re apply)
but I have noticed that my bank is becoming very cautious.It is probably worthwhile getting to know the real estate agents in the areas you are interested in, so if something comes up they can let you know. Our place was sold to people on the agents books before the ads came out. He put up a sign but just to advertise that they had sold the property.
Stephen, on the interest rate, I am going for a rise, I think the signs are that our monthly deficit needs a hand to be brought down, and the last rise did not seem to move the rate too much. The UK & (I think) NZ reserves raised rates at the same time, and with the UK property market also flagged as running hot in the UK it may happen again.
re the banks repossing, it is something that the big boys are loathe to do, because as you say the publicity is very bad. But a personal ancedate, Back in 1991 I had a client who was a personal manager for Citibank. Their banks policy was whoever wrote the loan repossed the house. She said some of her colleagus spent the majority of their day, changing the locks, putting the furniture in the street, and waiting for the former owners to come home. No urban mysth true storey, on Citibanks lower Nth shore clientele.
Now with some of the smaller lenders, with bad loans hurting their very chance of survival, I really don’t think they will care about the publicity.
Everything runs in cycles.Its human nature.
My observations when the interest rates rose to 18% the higher priced properties dropped significantly while the lower price properties actually rose a little. My belief is that people were forced to sell and buy in cheaper areas.
Regards Bear
Essentially I agree that a rise in interest rates could see the booming property market plateau. I have seen Hobart properties double in value in 2 years. 1 year on, prices have risen continued to rise another 50%.As for the value of property value declining, my opinion is that prices may reduce a small amount, however, I don’t believe that we will see significant reductions in price as new property owners will see the value of there property at a similar level to when they originally purchased, and won’t tolerate an enormous loss. When the market reverts to a buyers market once again, the source of the property bargains will come from the vendors who need to sell a property quickly.
For those selling the property value should be reasonably stable, however the time to sell a property will increase. Don’t let RE agents bully you into reducing the price to offload the property quickly. It’s your decision, not theirs. Make the RE agents do the work they are no longer accustomed to.
Cheers
MarcusTalking of new property owners, what is good on the outskirts of Melbourne to buy (areas like Hoppers Crossing, Cranbourne, Pakenham, Croydon, Coldstream, Lilydale, Narre Warren) for rental is brand new housing. You can get house and land packages out here for as low as $240,000. I personally think they lack character. I’d hate to live in a new housing estate. But you can depreciate the whole of the house cost, typically around 2/3rd of the total price, and in Victoria there doesn’t appear to be any stamp duty if you buy it before it’s built. The agent we sold the house through rents a lot of property to the NE of Melbourne and he was saying that young families who can’t afford to buy are great tenants and love such places. It’s probably worthwhile to establish the garden care of the local nursery, so spend a couple of thousand, but everything else is pretty much included in the package.
Property crash???
Property investing is a microeconomic decision. Each property purchase has to be assessed individually and should make good demographic and economic sense. Way too many shoe-shine boys in the market at the moment buying something for a $1 and selling it for 60 cents in the hope it will eventually be worth $2. With the RBA’s (short-term) rate rises the sun is about to set on speculative buying and it may very well be a long night. Especially if the stock market continues to take off (as it cyclically does) and the big money moves to richer pastures.
If most buyers bought over 12 months ago they may only see the value of their property return to its purchase price.
If prices fall most people will probably just hang on to their property/s until things get better. At least as long as they can afford to. This means less quality stock on the market to meet the demand and generally sustained pricing.
When interest rates go up there is normally increased pressure on rents. This time this may have to wait for the construction boom to cool a little more. But rents WILL eventually start to rise and the RE market will slowly regain its sanity.
I have seen many booms and busts in my life and this definitely smells of a bust. The scavenging opportunities that everyone is talking about will only be there once our shoe-shine boy goes back to shining shoes.To all concerned about changes in economic factors impacting on the residential property market, fear not.
We’ll all know when the property markets in trouble by the following TV shows being cancelled.
1. Burke’s Backyard – been around a long time.
2. DIY Rescue – like a new job, 1st in – 1st out.
3. Auction Squad – learning the value of over-capitalising.
4. The Block – no one will care if Ken & Barbie are beaten by ‘the boys’ (read: homophobia).
5. Backyard Blitz – Jamie gets his old “Manpower” buddies to help out in their dance clothes.
6. Ground Force – Graham & the gang try to match the ‘Blitz’, but due to a limited budget, have to do the strip themselves (D’Oh!)
7. Hot Property – will become an oxymoron
8. Room for Improvement – start to use 3 ply or cheaper MDF (if that’s possible) for their construction workAnd finally….
“Money” returns to our screens from the abyss ’cause someone mentioned that property wasn’t popular anymore.
Michael[
]Michael, I can’t wait, Paul should be paid for by the Government as a community service.
You forgot the other one…”hot Repossessions”…
this week we go to Kellyville where Simon and Sue are fighting to sell the home before the bank moves in….seems when they dropped their deposits on the “off the plan” units, they had a bit of a gap in their cashflow…that and the fact that Simon can’t charge for giving a plumbing quote anymore…Hi to everyone in property investement land,
I would have to aggree that we are knocking on the door of a down turn in the market. However i don’t think we can make generlisations regardindg all property to bust. I think any property must be assessed on it’s individual merit’s. We need to remember that threre are some property’s that are always in demand. It would be naive to assume that such property’s will maintain current growth rate’s, however, a drop in value would be unlikely.To all those Pro investors, start rubbing your hands together in anticipation for those propertys that are not in such great demmand.cheers
Chook…..Hi Steve,
Just got online with you after reading your book which I bought a while ago but could not get to until now. Thks a million. It was an eye opener. I just need a little advice for the moment.
To make it short, I put a down on a high end property in Sydney b’cos they offered me a 10yr guaranteed rental which made money in the first month and is also pegged to the CPI, whichever is higher.
After reading all the gloom, is it still good to go into it or shall I defer as high end properties do have a higher chance to fall during bust. Furthermore interest rate just rose again in just 2 months.
Best regards,
PatLow
Hi,Call me simple, but I would have thought that property prices coming off record highs would single the start of “buying season” for astute property investors.
As such, it also marks the end of “seller’s season”, where anything vaugely called a property increased in value.
I expect that I’ll buy more property in a down time than in a good time, provided I can:
Find the right property
At the right price
With the right person
Using the right strategyNow is the time to stand firm, take a position and act accordingly.
Buy your straw hats in the winter time [8D]
It’s only doom and gloom for those who bought without a strategy or became greedy.
Bye,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********For the most part I don’t think property will fall dramatically in a bust situation. There will be exceptions, but quality properties with reasonable returns probably won’t take a nose dive.
I think that what we’ll see is a protracted period where prices don’t move much at all. Property investing will become uninteresting and watching prices will no longer be a national sport.
During this period rents will start to rise again and property will start to show decent and in many cases positive returns. The nice thing about interest rate rises is that salaries go up, although affordability of property goes down. Thus more renters and higher rents. When rates drop a bit you’ve suddenly got property with excellent returns.
At that time, when property shows good returns (and combined with other economic factors) the overall interest in property will increase. That’ll be the start of the next boom period.
I agree with PT Bear on all but the drop. In Sydney we have seen the market come off 10% in some ares since before the rate rise in November. Since mid November the market has slowed a lot.
I’m looking for an adjustment similar to the UK, Boston, Calif, and Houston in 1991.An intersting thing to watch, is the price of oil per barrel. It is running over US31.00 per barrel. oil prices have always been strong driver of inflation. High inflation will lift incomes and all of a sudden property affordability will correct, without the govt stuffing….sorry doing anything.
All a matter of time.
Hi,Call me simple, but I would have thought that property prices coming off record highs would single the start of “buying season” for astute property investors.
As such, it also marks the end of “seller’s season”, where anything vaugely called a property increased in value.
I expect that I’ll buy more property in a down time than in a good time, provided I can:
Find the right property
At the right price
With the right person
Using the right strategyNow is the time to stand firm, take a position and act accordingly.
Buy your straw hats in the winter time [8D]
It’s only doom and gloom for those who bought without a strategy or became greedy.
Bye,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********These times when a rate rise is occuring will many bargains in the market place.
Speaking from experience I am glad that I made
the decision to fix my home loan rate.I agree the best time to buy is in a ‘down market’. But now is not a ‘down market’. It is a peak. There will be another ‘down market’ but it will never be as cheap as the last!
Cheers,
Shaun.grrr oil prices and the US dollar, don’t get me started – and don’t bother to try to buy oil with anything *but* the US dollar, because otherwise there might just coincidentally be a reason that you have war declared on you, bah humbug
OK where were we, property….
“put it in the bank (returns 4-5% per annum at the moment).” true.
If your bottom line (yield minus borrowing costs minus holding costs minus a buffer or ‘risk’ cost) is not more than 4-5 percent, then ask yourself what are you doing investing, and why?if the answer is capital gain, what will you do if it doesn’t eventuate and you have to sell short? what will you do if interest rates rise more?
cheers-
mini
]
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