Hi Foundation
If you are actually looking for holes in your theory, here is one that you may want to watch out for. Over the long term the median priced house you bought 10 years ago may now be in the bottom quartile. This may happen for example where new houses cost more to build than existing ones did. For the technical minded this is called a fallacy of composition ie what is true for a group as a whole may not be true for any individual member of that group.
Just for the record I’m mostly with Dazzling on this. If you are in a motor boat the main factor that affects where you end up is NOT the tide.
Cheers[biggrin]
PS
JTW I enjoyed and learned from your contribution- I for one won’t be trying to tear it apart.Originally posted by jtw:My theory is that 4.1 times your average earning in an average market is the type of house you would aspire to live in, an can afford (remember 30%wages bank criteria) when it is above or below the 4.1 is in MY judgement a time to buy or sell. JTW
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Dear JTW,1. Interesting post and theory.
2. Can your please further clarify on your hypothesis regarding the 4.1 average earnings limit as the recommended market exit price and its correlation with the banks’present l;ending criteria of 30% income.
3. Are there sufficient statistical data to confirm/disconfirm your hypothesis to date. If os, can you kindly produce these data for our collective joint analysis and review please.
4. Thank you.
regards,
Kenneth KOHOriginally posted by foundation:What? >100 views and nobody has a comment? After hearing “real estate cycles are typically seven to ten years”, “we’ve reached the low point in the current cycle”, “it may look like a bad investment NOW, but time heals all wounds – in ten years you’ll be quids ahead” etc so frequently of late, surely somebody is prepared to look for a hole in my simple analysis?
To reiterate, my thesis:– House price cycles are 16 to 17 years long.
– The cyclical low is always below a rising trend (‘fair value’).
– The ‘fair value’ trend of the current cycle for Melbourne is at current nominal prices in 2012 (around 368k / 300k x 2005 $).
– 2012 should be the next cyclical low, so selling prices should be below the ‘fair value’ trend at that time.If I could post graphs & tables, I could make my point more clearly, but any comment is appreciated.
F.[cowboy2]
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Dear Foundation,1. I must say it an interesting theory and perspective on re-looking/re-processing the past data on the median house price for the Melbourne property market.
2. Can you please send me at [email protected], all the relvant data, tables ang graphs, so that I can better understand what you are really saying in your post here.
3. How much lower is your cyclical low below a rising trend? So in your given example, how much below A$368,000 must be cyclical low be now?
4. Does your theory applies to the other property markets in Sydney, Brisbane, Perth, Adelaide and Darwin too?
5. If so, can you please provide the supporting data for us to jointly evaluate them with you.
6. Looking forward to learning from you further.
7. Thank you.
regards,
Kenneth KOHOriginally posted by foundation:I don’t aspire to be a landlord on a massive scale, but will use real estate to build wealth if and when it makes sense to.
Cheers, F.[cowboy2]
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Dear Foundation,1. Care to further elaborate on your a/m statement, “if and when it makes sense to” to use real estate to build wealth?
2. I am interested in learning more about your thinking on this subject matter.
3. Lookinf forward to your soonest clairification and elaboration,please.
4. Thank you.
regards,
Kenneth KOHhi all
I’m not one for following dazzling but I agree that stats are good as a guide but the investment itself is the main item to evaluate.
I follow rental returns which haven’t been mentioned in any of the stats.
It gives you a good idea of the movement of the market around an investment.
And if you used rental against demand and return against risk the stats are not that inportant.
I like foundations spread sheet and they would be interesting to have a look at but evaluation of any market place will take in this type of information prior to purchase (or should)
I don’t look at the market negative in any market.example
In a hot market you have the opportunity to sell at a good or high profit.
In a flat market you can rental or lease to carry the investment.
In a falling market use number two to hold that property and leverage to purchase investments to the highest level you can accommodate and time the bounce.
The bounce cannot be worked out with stats but must be worked out by you using your fundimental understandings (which is not easy to teach).
The market you are currently in is a very good market for the yidn_shalom24,Dazzling,MichaelYardney and etc of this world.
I like the current market as opposed to a hot market as it gives me a lot of bargaining power ( and negotiation is bargaining) and movement and for the people of 2002 who didn’t think this movement would happen it has been on the wall for some time.
The investors I see currently in the market place don’t work on stats they work on profit and to get that profit we must negotiate in all markets.
evaluate,evaluate,evaluate but at the end of the day the only way to make a profit is to take a risk.here to help
In reality, doesn’t everyone look at all the info that is infront of them?
I mean, when it’s noted that Perth properties have risen x%p.a. compounded, etc, even Dazz gets excited. But that’s just a stat that can’t be directly related to all Perth properties. Some will be more, some less.
But the info on the market is useful, but like all info needs to be interpreted carefully. e.g. if the ASX 200 is going down, people don’t stop buying shares. Same if property prices fall.
Munjy
My reply to:
Dear JTW,1. Interesting post and theory.
2. Can your please further clarify on your hypothesis regarding the 4.1 average earnings limit as the recommended market exit price and its correlation with the banks’present l;ending criteria of 30% income.
3. Are there sufficient statistical data to confirm/disconfirm your hypothesis to date. If os, can you kindly produce these data for our collective joint analysis and review please.
4. Thank you.
regards,
Kenneth KOHI don’t have any stats for you, other than the experience I have had. The 4.1 times my gross earnings was something I just came too as a conclusion after buying and selling 11 houses. I am the first to admit that I haven’t even had a real investment strategy until (still formulating one actually) recently. The main reason I have bought and sold is that I kept getting transfered with my job. The 4.1 times is a rough guide I used to estimate if the house was affordable. After I made a bucket of money on my ever moving PPOR, I thought I might buy a couple of investment houses when it appeared they were relatively cheap. As an example I bought a Jeep G/Cherokee 4WD in 1999 for $55k and at that same time I could buy reasonable house from $85K. (Brisbane suburban 3/4 bedroom brick).
I actually bought two. 1 @ $102K and another @ $125k when my wage was 65k. I bougjht another one later for 179K which was still within my affordability ratio of 4.1 . The theory of 4.1 is simply that houses are relative to your earnings. We have had good and bad times in the real estate market and I just use this as a measuring stick or reference point so that I don’t get sucked into the whirlpool of RE hype. Have a think about your PPOR now, is it roughly 4.1 times your earnings ? if it is more or less than this does this affect your aspirations? I think most people will spend everything they have. If you get promoted at work you don’t take long to find a home for your money in ‘time for a bigger house/ better car/ new boat’ syndrome. I’m sorry my approach isn’t more scientific, but I hope that my approach might be helpful. I found it better than stats. As they say there are “Lies, Damm lies and Statisic” I hope to see some more replies. I really like this post subject.
JTWhi jtw
I read with interest your post and your figure seem ok except for one minor point.
What if you are investing as aliving and your earning are directly related to your investments if you put your equation on a spread sheet it would tell you that you are in a circular equation.
Ie your wage is relative to your investments and your investments are relative to your wage.
Your figure do work if your as a paye investor and I would probably be close to working with them.
But as an investor.
I look at growth or likely hood of growth against risk,
Return against outlay.
lend (80% or 100%) against rental for the area.
demand against vacancies.
Type of property comm against resi
Stats are helpful to answer the above but good old fastion get in the car and look at the property is best.
Take at least a day to check all of the above in the area you are investing in and then make an informed decision.here to help
Hi Gross Realisation,
You are right about it from the prospective that I haven’t considered rents etc, Because I haven’t been experienced enough to become a profesional investor. I guess that I put forward my laymans view of average wages to shine a different light on this arguement of “It’s all doom and gloom” -Vs- “We will just buy real estate and it will automatically make us into millionaires”.
I guess the market rent is another way to look at the affordability factor, I don’t really have a formula for you on this(yet), I haven’t been able to get the “11 second” solution to work for me either, but I just signed a contract on a CBD unit today for $175K that pulls $295 per week. After body corp etc it pays for it self, I don’t put in a cent (because of my equity PPOR) and therefore I see it as a no cost investment. The earning rate of the rent tells me it is cheap enough, somewhat like the theory of 4.1 based on an average wage looking at an average house. If was earning $1 million per year, I wouldn’t be living in this house. Really what I am trying to convey is that Real estate value is related to affordability. If it just kept going up as it has in recent years, well future generations would all end up as renters. I have a doom and gloom acquaintance who keeps on trotting out worn out sayings such as “Our kids will never be able to afford real estate”. I tried to explain that at the moment it might be a struggle, but after a dry spell in real estate all the ‘would be If I could Be’ RE investor types will drop out. Then real estate will become too cheap again. True & steady investors will remain (and I assure you that when I see my megre public service wage being able to buy a house for 2 point something times my wage, I will buy up like I’m paying monopoly.) I have seen some other posts on this forum and I can’t believe the B**S** that the doomsayers are carrying on with. Read the one on the “global oil (Bush/Cheney)conspiracy”, Wow that will get you laughing, I hope those doomsayers are selling RE soon.
The reason I think that RE doesn’t usually fall much is that it is a necessity of life (shelter) and most people will sacrifice just about everything else to hang onto thier House. When people can afford it they buy, when they can’t they put it off for a few years. I am convinced that over time RE is the best investment.(slow and steady wins the race).JTW
I’m with gross on this one. I get lost with all the figures and stats and don’t really think there is one perfect way to always maximise your investing. Too many people are out their trying to squeeze the last little dollar out of their investments. Sometimes its better to take a little less of a return and have more freedom and time to do other things. Does it really matter if you’re getting 1-3% less return than the absolute best method. It may take longer to make that fortune but at least I’m enjoying it whilst I’m making it. Investing should be something you enjoy rather than something you always worry about Don’t get greedy and try to rush towards those millions of dollars or hundreds of properties. Look at what you really want and need to make you happy and go for it carefully. The market always has ups and down and some people can always make money in these markets, but not everyone, and those who normally make it are making because someone else either made a mistake or didn’t realise the potential that was there to be taken.
C2
Rich in happiness and money is better than rich in money with no happiness.
I am in total agreement with you C2 on your point about relaxing, thats why I personally prefer real estate over shares etc. About 15 years ago I had a small windfall of $6000 and my relative Ray got an equal share. I put it into RE and Ray put it into shares. At the time Real estate was really in the Doldrums and did nothing for a long time. Now I know on paper shares look to out perform RE in statistical terms, but Ray won’t tell me how much his Compass airlines shares are worth. (I wonder why. He hasn’t given me grief over my “All your eggs in one Basket” real estate investment strategy either.)
Gross Realisation,I gave your question some further thought. I have come to the conclusion that I am just happy to buy any Rental proposition as long as it pays it own way and will Capital gain in the long run, sorry no formula but I can still work out if it is affordable using 4.1 as a guide. The only thing that would make me gun shy about investing for rental would be if the Govt withdrew Negative gearing because it would cause a major market depression.
Looking forward to further discussionJTW
Cant see any more newer threads regarding the property cycle, but IMHO we are in the new cycle for about a while now what do you think. I got my all thought about it in my article Another Australian property cycle in full swing.
Cheers
Dan
As usual, a great post F; thankyou for the stats, although the figures baffle us at times.
You need to get a life I'm thinking.
I think the 7-10 year cycle that you refuted is not the PEAKS of the cycle, but how long the average price of an average home takes in TIME to double.
Can you reach into your stats bag and drag out what the average price of a 3×1 in Melb was in 1901, and what it was in 2001 and tell us how many years it took, on average, to double in price during that 100 years.
This is the stat that all the real estate spruikers trot out at seminars I'm guessing.
I do agree with you about the continuing slump, despite what the industry pundits keep saying. It all comes back to affordability – it is very low right now. I think the only reason the correction has been so slow this time is because of the innovation in loan products and the relaxing in the finance industry of qualification for loans, combined with the relatively cheap finance money today.
It will be interesting to see what happens if interest rates hit double figures in the next few years. I don't think it will happen, and the govt and finance industry can't afford for this to occur, so they will try to prevent it at all costs.
I am no expert on Australian macroeconomic trends but assuming that interest rates are at about the levels that are in US and Europe, which are still low by historical standards I would agree with F's comments that the reason the slump has appeared much less severe is because we are seeing only the beginning of the correction of a very sharp increase in housing prices in the last 5 years due to the very low interest rates. Of course such an assessment is valid on the assumption that interest rates will continue to rise, which is really an unknown factor. I know in the US economists were predicting every year since 2002 that interest rates would rise but those predictions did not come true for many years that followed and still by today they haven't risen as much.
Hi, Battleships made a valid point. House price has a replacement cost. I feel the current price of housing is part of the inflationary situation & cost of money. It costs me $240000 now to build a house where pre GST in 2000 even 2002, it would have cost only $160000.
Unless everyone who needs a house has one, the demand will still mean we need to build some new houses.
The local population too needs new houses so just looking at migrant numbers may be missing something.
Cheers,
kum yinGenerally speaking, IMO, everyday mum/dad property investors should not even be looking at cycles…my general rule is: the earlier you buy, the better…whether its a high, trough, whatever…
The point here is, by all means do your research, due diligence, and educate yourself…
but wouldn't you be a bit silly if it stopped you investing in a promising deal… and there are still promising deals (even with the statistics).
Oh dear. It can be embarrassing to see old threads rise again. I feel like I'm in Sean of the Dead (great movie btw, very, very funny).
I'd like to retract some of my cycle theory cockiness. I'm far less convinced today that the market is as cyclical as I'd thought. I still think we're on track for a 'cyclical low' of ~$300k 2005 dollars in 2012 though, so.. who knows?
Hi Foundation,
I'd forgotten about this thread too. I am still a 'slow and steady wins the race' type investor . I think that the sustained real estate prices and the improving outlook is still related to affordability. We have very low unemployment, lower taxes, higher rent yields. I think this will support prices and mildly improve them. An earlier post mentioned migration inflows- This will mean continued demand. 2 years ago when this tread started , things looked more uncertain
Overall I am reasonably confident about the outlook but not expecting anything spectacular in capital gains. What do other forumits think??jtw
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