With all the negative news we’ve seen in the papers lately (especially the Sydney Morning Herald) you’d think that the property is in meltdown. My friends who know I have some property in Brisbane and Perth regularly ask me ‘Are the price falls affecting you too?’
I don’t really bother explaining to them that in my opinon, my properties haven’t really fallen, because I value them at a yield of around 5%. At the peak (and I still see Sydney properties regularly advertising at this) the market was around 3.5% yield. So even with a 15% fall it’s still running at around 4% yield, which I still think is expensive.
I’ve always valued my properties at around 5% yield. Which means I could have sold my properties at 15% higher than what I have them on my balance sheet now, so technically I ‘lost’ 15% that I never recognised as mine in the first place. On the other hand, my cashflow will probably increase as a result of this fall (since rent and values tend to move in different directions) so unless interest rates rises significantly, I’m better off with the fall.
So my points are these:
1) The current market drop is from truly insane levels (3 – 3.5% yields) so if you’ve bought conservatively it doesn’t affect you.
2) Your cashflow will increase as a result of this because the market drop will increase in rent as the IP market slows down.
3) Market value doesn’t matter if you don’t intend to sell. Which I don’t: I’m going to hold on to these properties for 20 years to let time do the work for me! (I am 27 and started buying property at 22 so I figure I have time on my side! – planning to retire by 40!)
4) It’s funny how people assume a rising market automatically increases your wealth (which it really doesn’t unless you sell or refinance regularly) and a falling market automatically decreases your wealth. The fact is as long as you’re not flipping properties while borrowing at red-line levels, it doesn’t matter. If you are a ‘buy-and-holder’ you can just ride out the cycle, and if you’re a +ve CF’er you analyse based on rent anyway.
Finally:
5) The people with no experience with property are starting to panic. The next 3-5 years will be a prime buying window, especially for Sydney in anticipation of the boom in the next decade!Alex
HI Alexlee,
I’m in the same boat as you… Buy and hold and let the property work for you.
Property prices up or down I don’t care because all mine are + CF, nothing less than 12.3% gross.
In 20 or 30 years time they are sure to be worth a heck of a lot more.
I’m currently sitting and watching the QLD market patiently coz within the next 18 months there are going to be lots of bargains as the nervous wannabe investors decide to dump and run.
Cheers, Nobleone. [biggrin]
“Making mistakes is just another another tool for learning.”
When investors become nervous, or just plain tired of it all, and want to get out of their investments, don’t always assume the bargains will be obviously listed a lot cheaper than market value.
Greed being what it is, properties will initially be listed for perhaps a little cheaper than market value, just to get an interest from buyers. Only by seriously making low offers can you perhaps stumble upon a desperate investor who will accept your offer.
The alternative is to attend auctions and pick up a great deal that way, however you need your deposit and finance all set first. A number of building inspections prior to a number of auctions may become expensive after a while.
Also a tip: If you are very serious about making a purchase in the future for a certain amount, then let your RE agents know at least once a week that you are “still looking”. Many times, IP’s never even make it to the RE agents window as a listing because it has been sold immediately from just a phone call to an investor.
Cheers Brenda.[biggrin]If you want to get out of a hole, first stop digging.
I think the first 6 months of 05 will see some scary stuff in Sydney.
A mate of mine (valuer) who i’m about to meet for lunch at La Perla in Gladesville (great resturant) also owned by a mate of mine (c u there) has been inundated with mortgagee vals for banks lately.
So yes the s..t is hitting the fan but a long way to go yet. brisbane is a good buy for three year old properties, stay away from new ones and marketing companies (two tiered is thriving in QLD)
Phil
I’m literally drooling over a market correction in Sydney properties. I’m from Sydney and I didn’t buy from 2000 – 2003 (always thought it was too expensive). I’m currently overseas but when I get back in 2005 I’m going to actively look at properties. Pick up just one or two a year until the boom that’s going to come in the 2010’s.
I just find it funny how people keep saying ‘But the market won’t boom again until at least 2010!’ Heck, we’re almost in 2005. 5 years is NOTHING when it comes to property investment! Compared to the 40 years you’d have to work for an inadequate super payment….. ugggghhhh!!!!
Hey Alex,
Don’t let it bother you, alot can happen in 5 years. It’s the nature of the beast, and I find it amusing (to say the least) after watching 4 cycles to find my first IP bought for 27K nearly 24 years ago sell for 550K in a cool market….go figure!!! [biggrin]
“Sit down, buckle up and enjoy the ride” I always say!!! Works for me!!! [winking]
Jo
Exactly. My properties are cashflow neutral (they’d be positive if I didn’t keep re-financing to buy more), and I’m still young. I’m planning for 7.2% average annual gains, and I’m guaranteed to be rich by 50 even if I do NOTHING from now until then.
Obviously I’m going to do more than sit on my hands. (Plus the more I see the world the more money I realise I need: currently up to $1m net income a year with at least $5-10m needed for the property (-ies?) I’m going to live in myself!
Alex,
I agree. I don’t have any IPs now and I’m 34. But there’s still a few cycles left for me to hit my targets. I’ve already got about $1M in equity and I did this without investments!! Just worked hard, saved hard and bought my PPOR.
Can’t wait for a Sydney down turn. Bring on the doom and gloom!
Cheers,
Michael.Alex,
I think if you buy early then you have made your money and you can afford to ride the downturn because your yield is higher and you have some buffer against interest rate increase should that happen.
Even if the market drops I think it will take sometimes for the rent to pick up. As you know buildings are still going up as we speak so supply will be plentiful for a while.
It’s true if you are holding for long term (investing rather than speculating) it’s probably wouldn’t matter much to you whether the price is going down. Might slow you down in getting the next properties if you don’t have enough equity though.
Rising property market that pushes the prices up does make you wealthier weather you sell your properties or not. The same logic applies when it goes the other direction. That’s how you make the money, from the price increase.
As to whether the next 3 to 5 years will be a prime buying window I wouldn’t want to quess. I don’t know how the economy and interest rate will be.
But since you are only 27 you have plenty of time left. I don’t have IPs but used too so I am talking from my own observation (or prediction)[cap]
It would be interesting to hear the research that puts the next boom at 2010 or thereabouts! There are many factors to the contrary; baby boomers retiring, birth rate low, shifting world economy, migration factor and Australian’s very low retirement savings. The NSW govt has placed a land tax on property other than a PPOR and we are all aware of the constant threat of a interest rate increase.
I am unable to support the property cycle theory blindly and suggest there must be a reason for it to trigger if, in fact, we are ever likely to experience another boom.
We all hope that things will go well but with many thousands of dollars involved there must be a reason for the optimism.Originally posted by marsden:It would be interesting to hear the research that puts the next boom at 2010 or thereabouts! There are many factors to the contrary; baby boomers retiring, birth rate low, shifting world economy, migration factor and Australian’s very low retirement savings. The NSW govt has placed a land tax on property other than a PPOR and we are all aware of the constant threat of a interest rate increase.
I am unable to support the property cycle theory blindly and suggest there must be a reason for it to trigger if, in fact, we are ever likely to experience another boom.
We all hope that things will go well but with many thousands of dollars involved there must be a reason for the optimism.Thank you. Agree totally.
This was NOT a normal cycle. It had several unusual factors.
1. Historically low rates.To a market conditioned to 8.50-12 %2.The property investment marketeers, sending a horde of naive investors in search of the promised pot of gold
3. Special incentives to stop the building industry collasping after GST
4. And the biggest, the dereugulation of the banking sector.
8 years ago I could only borrow 450K on 180K income. Now I have seen ppl borrow 360K on 65k and probably many who haved borrowed significant amount with very little real income.
Interest is now a greater % of household incomes than ever before, and we are facing the years when at least some of the boomers must unload.
Some say the market has adjusted softly. It hasn’nt started to adjust. It will only adjust when the perception is that the boom is definitley gone. With the REI talking of a bounce in September many thought the correction was finished. Dream on.It will only adjust when the media realises that doom and gloom will sell more papers than “how much your suburb has gone up this year”. That time is just around the corner.
Will be interesting times ahead.
A list of very good points that contributed to our recent property boom. The last 60 years have also been dominated by the Baby Boomer ‘surge’ influence. The next and ,probably the last, will be their selling of assets and downsizing. I get the impression that this last boom was also subscribed to by many ‘BB’ investors who will now want to sell their investment properties to support their retirement. Anecdotal evidence suggests that some of these properties are on the market at the desireable boom time prices and vendors very reluctant to let go at market prices.
I also here forumites saying “I don’t have any IPs now” which suggests they saw good reason to get out of the market.
I guess there are some good buys out there and I would like to hear some good reasons for optimism.
My optimistic drive is for the sort of property that people would like to retire to!Hi, gmh454. I agree. This has not been a normal cycle in that it has been a lot more volatile than before. I think anyone who bought Sydney properties at 3-4% yields are in for a LOT of pain in the next couple of years.
My point is this: there is a massive difference between buying at (of valueing existing property at) 5% yield and the ‘median price’ or whatever price the newspapers are touting implied a yield of 3.5%. Median price is important, but in a market as inefficient as property it’s misleading.
Therefore, if you buy a property renting for $200 a week for $200k, and suddenly the market drops by 30%, are you in a hole? Not necessarily. The ‘market’ was valuing your property at 3.5% yield of $297k, because a lot of people were buying properties around you at that sort of price. So even if the market dropped 30%, the ‘median price’ just moved back to your purchase price.
My own strategy is time in the market, but I also do some cashflow analysis as well. I mean, buying at 3% yields in Sydney would have been insane. I’m now starting to see ‘average’ yields rise to 4.5% or so, and if I look hard enough I’ll see some 5%+s in Sydney.
What is everyones view on what will happen as the baby boomers die? IMHO we will see the greatest transfer of wealth in history over the next 20 years as the BBs die and thier kids inherit the wealth.
I know that there will be many properties (deceased estates) for sale as a result but on the other side people like myself will be out there buying with our ears pinned back fueled by a sudden explosion in our capital base i.e. $500 to a million of cash thanks to dear old mum & dad their frugal thinking.
Don’t underestimate the volume an velocity of this effect.
Yes, I agree. In the future we will have wealthy young people from ‘old money’ more so than now. On the same time we will also have larger number of people that will rent and can afford to buy. I quess only time will tell how far the market will correct itself.
Whoops! There may a big error in this line of thinking. The ‘Boomers’ are going to fund their retirement and nursing home life with these funds.
If you are waiting for an inheritance,don’t hold your breath, you had best try to tap into the funds directly. Buy a nursing home or life style properties. You may also find a willingness to rent properties so that funds can be retained for investment purposes or just day to day’living.
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