Ok we’ve all heard the news about the possible 20% drop in property and increased interest rates. As a first time investor when is the best time to buy and what do I need to look out for to signal when to buy and when not to buy?
The best time to buy is NOW.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksA personal comment regarding the drops (and rises) reported in house prices:
To say Sydney house prices have dropped up to 40% implies that all houses are created as exact duplicates of each other. Comparing prices of houses is pretty much always an apples / oranges thing. In general you can get an idea of the order of magnitude a house price should lie in (ie hundreds of thousands or millions) but because someone lists their house at $1.2million one day and then the next they drop the price to $800 thousand in no way means “house prices have dropped” It means the original listed price was way inflated. What would have been reported if the same house was listed at $400k then after much buyer interest was finally listed and sold at $800k? Does that mean house prices have doubled? No it means that house was massively undervalued.
So you can take from this line of reasoning that presently there are a fair number of over-valued properties on the market and they will be taken down in price. At the same time there are many fair value properties and some under valued properties. What is important is not WHEN to buy but WHAT to buy. The answer is pretty much always the same: do your homework, set your goals, understand your possible outcomes and use that to list criteria by which you value a property. Then go out and find a list of properties that match your criteria and make offers.
Now is always the best time to buy. There will be times (like say 5 years ago) where the market was more forgiving of mistakes and most properties went up in value, but when the going gets tough, the smart make money.
[biggrin]
what do I need to look out for to signal when to buy and when not to buy?Buy residential real estate when you can afford to and when the return on your investment will be greater than the return on other investment options. The 2 measures of return on investment are yield and capital growth. Both are important.
Do not buy residential real estate when prices are falling and yields are miniscule. Do not gamble your own house and future financial stability on an over-priced, depreciating and deflating asset.
I consider 11%+ gross the absolute minimum annual yield in a flat market. I will not buy in my area (VIC) until inflation adjusted prices have fallen by at least 30%. Even then I will wait until the cycle has clearly passed its lowest point.
Cheers, F.[cowboy2]In 20 years time, anyone who buys now will probably think it was the right time.
However, all I know is that after a property cycle peak, it often takes years for prices to recover, after a healthy correction.
For example, after the 1980 peak, there was a drop, and it took 7 years to get back to the highs. After the 1989 peak, there was a drop, and it took about 10 years to get back to the highs. Thats a long time to wait to get a return. I’m not saying it will happen again, however on valuations, a correction would have to be likely. Property PE’s compared to the sharemarket are crazyly high.
I reckon the property market in Sydney and Melbourne topped out 18 months ago, and it will be years until prices get back to the same levels. All other markets just follow, so there is a time delay. WA and QLD are being held up by the resources boom, and so will stay up while the boom continues, but they weren’t so overvalued in the first place.
Property has had an incredible run, but it can’t keep going up at 15% a year when wages and inflation goes up at 3%. It’s just common sense.
Good luck.
In 20 years time, anyone who buys now will probably think it was the right time.Unless house prices are 30+% overvalued in 20 years time, I don’t believe the average house purchased now will appreciate faster than inflation over the next 2 decades. However, given that many people don’t understand the difference between nominal and real values, I guess you are right. For me, any return less than inflation is a loss.
Cheers, F.[cowboy2]“Property PE’s compared to the sharemarket are crazyly high.”
what makes you say that? I would like to buy some shares but at their current prices they are just too expensive. I would expect the inevitable share market correction to prop up real estate values
http://www.megainvestments.com.auJohn Carroll
bob the worker wrote:
However, all I know is that after a property cycle peak, it often takes years for prices to recover, after a healthy correction.For example, after the 1980 peak, there was a drop, and it took 7 years to get back to the highs. After the 1989 peak, there was a drop, and it took about 10 years to get back to the highs. Thats a long time to wait to get a return.
I couldn’t have put it better myself.
The Mortgage Adviser wrote:
The best time to buy is NOW.You really can’t argue with that logic can you.
I would like to buy some shares but at their current prices they are just too expensive.There are plenty of shares returning around 7% pa in dividends at the moment. Plus you have much higher liquidity than in real estate. However, as I’m still expecting the XAO to touch 3700 later in the year, now is not the time for me to be trading with borrowed money. As a hedge I am holding a geared equity managed fund. Win-win!
Cheers, F.[cowboy2]Ausprop.
After this 10% correction of the last few months, the sharemarket was at 14 year low PE’s. It was about a price to earnings of 14 from memory. A Sydney house with a rental yield of 5%, has a PE of 20. That’s gross too.
It means that company profits have been increasing faster than the share prices. That won’t and can’t continue, but shares are good value historically. That was a few weeks ago anyway. Admittedly, a big reason for such good average values is because of the tremendous profits being made in the resources sector, and which could continue next year as well.
All I know, and it’s a fact, is that shares are historically good value, and property is historically very expensive. This does not mean that shares will do better than property. It’s just a guide as to values. Also, all the big sharemarket crashes have happened when average PE’s were well into the 20’s. Like Oct 1987, and April 2000.
Remember, that if house prices do drop significantly, it would have a big effect on plenty of shares. Like retail and banks.
Good luck.
You must be logged in to reply to this topic. If you don't have an account, you can register here.
