Hey!
I’m currently struggling to see how real estate is a viable investment in Australia.
When Steve McKnight started his investing, the market conditions were vastly different. My ambition whether it is realistic or not would be to have a property portfolio consisting of 40+ properties. Only a portion of what Steve has a achieved, yet seemingly impossible in today’s market.
Some people are pushing the idea of capital growth as the money maker in real estate. But this is how I see it: You purchase a 3 bedroom, 1 bathroom house in an average suburb that has potential. You rent it out for anything between 3-7 years lets say (most probably negatively geared), and in that time your lucky enough to see some capital growth. From my understanding you don’t sell but use the equity you have gained to help purchase the next property. Well the next property has also increased in the SAME market and therefore you’re purchasing at an inflated price. This would only work if house prices were to continue to increase, which is completely unrealistic.
While other people (know better example than Steve himself), advocates positive cash flow. It does to me sound like the most obvious way to invest in property. Robert Kiyosaki, an American businessman, author and multimillionaire (if not billionaire), say that you make money from real estate as soon as you purchase the property, (as in positive cash flow). Robert says that investing in real estate for capital growth is like gambling.
The real estate market in Australia, I see as a very inflated market. When I moved to Australia (Adelaide) in 2003, a house worth $500k was a very nice property. Now half a million dollars buys you very little. I see units asking $400k, surely this is unreasonable. So if current prices are not affordable, to think property prices are going to continue to rise is unrealistic. Surely this inflated market must decline at some point in the near future. They say the property cycle is 7-10 years, well I’d say we have had the boom now its time for the bust.
So what do you think to my rant? Am I being reasonable or am I just another person complaining about the cost of housing in Australia.
I guess I’m looking for people’s opinion on whether capital growth or positive cash flow is better in the future market.Cheers!!
I'm very new to this so my arguments are simply speculation based on hearsay and what I read. You raise some interesting points. A person i worked with previously argued something very similar that what happened in America was due to hit Australia in the next couple of years because it is just not sustainable. Property prices have also been inflated due to government grants and such which are being phased down / out. I see wages a major factor in all this in addition to inflation, interest rates and other variables that are somewhat controlled aspects in an otherwise free market economy. The thing is however, were not these same arguments being expressed 10 years ago and longer? Yet despite the doomsday forecasts, property prices have continued to rise and with it, capital growth and the acquisition of wealth for people positioned in the market. I only own my home I just bought 3 months ago and have to say I'm a little nervous about interest rate increases atm. At least the RBA has some control over property as they can lower interest rates if the need arises, but seems their going to continue going up a little further in the near future. Intereesting topic though would be good to see some perspectives from those practising property investing.
I caught a taxi in Sydney yesterday and was talking with the driver. He was complaining how little cab drivers made from a 12 hour shift and that it wasn’t worth it. I asked him what he planned to do in the future then, he said that he only drove taxis 2 days a week and had a fulltime job as well. I asked him what he was saving for. It turned out he wasn’t saving, just trying to pay his mortgage on an apartment. (This is when interest rates are at an all time low).
Here’s the killer, when I asked him what his fulltime job was, he said he was a software engineer. When software engineers have to take on extra jobs just to pay a mortgage on an apartment, the property market is in serious trouble when there is the slightest upset in the economy again, now that people have mortgaged themselves to the hilt, when interest rates are really low.
Hey thanks for your replies Surrealist/mattnz.
Surrealist you say that 10 years ago people had the same arguments. Thats most probably true, people have always complained about property prices. But they say that property goes through 10 year cycles, well I would say that properties have been increasing for the past 10 years easily. And whenever there is a property boom there is a bust. Also 10 years ago Australia didn’t have the excessive debt that it now has.
I think Australia is in a unique situation makes it very different to the USA. Things such as population growth, ageing population, skills shortage, WA and minimg boom, conitnued minimg boom and china growth. I think all this is a flow on and chain reaction that moves and touches directly or indirectly industry and investing such a property. Australia will continue to grow and people will keep wanting to come to Australia to live for a long time…….
Just my 2 cents……
Im of the opinion that people are just regurgitating what they hear on the news or from a real estate agent – mining boom, china growth, skills shortage etc without much actual research or knowledge themselves. So many people are getting into investment properties because they hear how someone else has 20% in a couple months and are being told that if they dont get in now they will miss out forever. I cant see it as sustainable. I think it will peak at a point where noone will be able to afford the high prices anymore and it will slowly drop down – no idea how much though.
Even if none of the bears predictions come true with respect to affordability and the ratio of income to mortgage payments, all it takes is another major terrorist attack or some other major upset for everyone to freak out and all the world economies go haywire.
I read conflicting reports on China teetering on the edge of collapse, but then again China ready for a big boom. If China collapses, we arent far behind as we are so reliant on them purchasing our exports
Who knows!I guess one example about false information is how everyone carries on about there isnt enough housing and vacancy rates are dropping. The stats from REIWA beg to differ – vacancy rates in Perth are higher than they have been for 8 years http://reiwa.com.au/research/listings-rental-trends.cfm
All Im saying is dont blindly believe everything you are told!
Thank for raising this issue. I think it is very interesting to predict what could possible happen in the property market.
My thoughts on Australian property market are summerised as followed:1. The Australia property market has been booming in the past decade due to the rise of China as a powerful nation. Australia has reaped significant benefits from China development into the richest country in the world in the last decade, thanks to the good trading relationships and favorable immigration rules which have boosted the revenue of Australia's big miners and record number of Asian migrants moving into Australia. Without these factors, I doubt Australia property market could still sustain the high property prices during the 2008 recession period when the US and UK property markets busted due to record high level of household debts. With incomes coming from China demand for Australia natural resources and increased number of Asian migrants, the unemployment rate in Australia has never exceeded 6%, which should be considered the major factor that keeps property price from falling but rising in the last 2 years (not to mention the housing incentives like First Home Buyer Boost, ect)
2. What happen if China suffers from the burst of property boom in the next 2 years and the demand for Australia iron ore falls, commodity price reaches record low, resulted in mining jobs lost and rising unemployment rate (say 8-9%). To make things worst were that US could be hit by the losses in commercial real estate loans during the same period, caused the world economy to slip into a greater recession! In such extreme ecomomic conditons, any county around the world with inflated property market should face the burst of inflated assets like stocks and real estate. As stated in the book of Robert Kiyosaki, one of the new rules of money is to prepare for the bad times ahead and you will only know the good times. I hope the worst times will never come, however, we should have been well-prepared if it did come at last.
No doubt the property prices are high in Australia and It does mean little room for investor to profit from capital gain, and 9 out of 10 properties out there have negative cashflow. I will try my best to look for the 10th property with at least a neutral cashflow , if not a positive cashflow, because opportunities can arise if we keep searching for what we want and learn how to search better as time passes.
pashabulker1 wrote:Hey thanks for your replies Surrealist/mattnz. Surrealist you say that 10 years ago people had the same arguments. Thats most probably true, people have always complained about property prices. But they say that property goes through 10 year cycles, well I would say that properties have been increasing for the past 10 years easily. And whenever there is a property boom there is a bust. Also 10 years ago Australia didn't have the excessive debt that it now has.Yes personal bad debt, no doubt the key difference from a decade ago. Maybe should of included this in your opening post as it certainly supports your argument.
This is my personal view,Australia is a relatively new country and has strong growth as well as strong immigration levels annually. To say that property is a gamble is a bit narrow minded considering you have a housing shortage, rental markets on the increase and a government that can not afford to build public housing themselves. Inflation will always happen, prices will always go up, if they dont then the stock market will crash as will everyones super portfolio which rely's on share prices going up to make a profit.
15 years ago I was listening to people tell me that property could not possible go up any further, I smiled and bought up, I still buy up, now the people who were trying to talk me out of it are kicking themselves as they have done nothing.
Not only to I actively invest in property but I also recently used my super to borrow money to build a property and set up a SMSF, it is already increasing as is the rent every 6 months. Each to their own, but Im a 39 year old mum of 2 and I never have to work again if I dont want to and my kids are also set up and dont have to worry about having their own first home in Sydney whcih will be well over a million dollars by the time they move out in 8 years time.
I used an investment property firm for my first few purchases and then once I was comfortable with understanding it I started doing it myself and now I do the whole lot except for my SMSF which I dont want to invest the time in so it costs me $20 a week (1100 a year) and it is all done for me and regulated by asic/apra etc. It is not a unit trust, the properties I buy through my fund are mine 100% so I dont have to worry about other people making bad decisions and after the GFC for me personally im glad I didnt have any of my money in super funds as i would still be behind and it would take me 3-4 years to amke up what the fund I was in lost. Each to there own, but every self funded retiree that I know owns a few properties and has a steady income stream that no one can tell them what to do with or limit the amount they want each week. But Im happy for people to continue thinking that property is a bad investment as the less people that buy their own house the more people out there to rent my properties.It may not be that complex. This could simply be supply and demand at work.
Demographers are united in their reasoning that there are not enough houses, or too many people (this was certainly not the case in the US and other inflated property markets). This would suggest that only a massive population exodus, or an equally significant upswing in building productivity would even out demand. It would take a long time for either of these things to occur.One more thing, you need to invest in the right areas, that is common sense and there are plenty of companies to help you do this and provide good information on why, people who paid big bucks in WA will suffer as there is not as much diversity of industry as there is in other areas, but it goes in cycles and you should factur 12 years it will double not the farcicle 7.2 years. The same as people who bought in new estatews in Bunderburg did 10 years ago as there was not enough going on there at the time and the rents were never going to stack up, I steer clear of places that offer a guaranteed rent return as it is usually built into the property price to begin with, each to their own though.
An interesting post.
Having been in property for about 10 years and doing well from it, I can say its the best thing we have ever done.
The danger is, in not doing your research. There is not "a" real estate market in Australia, there are many markets and sub-markets. Kiyosaki is big on knowing your market, and buying at the right price. And quantifying risks, which is vital. Cashflow positive property is fantastic but hard to find; more likely to exist in higher risk areas.
The US market is very different to ours.
The recession hit them much worse than us, thanks to China and India as others have mentioned.
But there's more to it.
Do you know, if you bought your home in USA for say $200,000, lost your job and couldn't pay the mortgage 3 yrs later, and (eg industrialised area like Detroit) your house value had fallen to say $20,000, all you have to do is give the keys back to the bank and walk away from the debt! Figures are made up, but the notion is fact. Here you'd go bankrupt.
No point in buying that house, as there's no jobs in the areas so no-one wants to live there, even at cheap rent/ And social security cuts out after 6 months, so don't rely on the dole for the rental payments.So I don't believe prices will drop here, supported by population growth and immigration. We can't afford to reduce immigration, as who will pay the pensions for the mass of baby boomers due to retire over the next 15 to 20 yrs? I feel positive about our economy which will support house prices. Depends on your view.
Who would say Sydney had a stable property market this decade? Western Sydney has dropped from 2003-2004 highs, by up to 20% to around 2007. Now regained by First Home owners grant, while the "richer" suburbs suffered in the last 18 months or so.
Wages have varied over this period, depending on what industry you're in.
And I perceive (May not be right) that software engineers are not paid very well currently, hence taxi driving to supplement income.The majority of expectation (economic forecaters etc) last year was for property prices to drop even by 10%, but that was not so in Melb, Sydney, Brisbane/Gold Coast. Darwin has boomed despite predictions.
If you are not in real estate, you can't make money from it. Or lose it, to be fair. So I would recommend, read Steve's (revised) book and learn more about ways to make it work for you.
quickchick
Thanks for your posts guys. Nice to hear from lots of people.
I currently don’t own any property because I’m still only 19! And I guess I am being very cautious not to enter the market at the peak, however its inevitable that some day I will need to buy a property. So if I buy tomorrow and the Australian property market shits itself, is that really the end of the world. I might own this property for the next 20-25-30 years.
I read on another thread on this forum, someone saying that in 2050 the price of a small car will be something like $400k. This might not be particularly accurate, but it makes the point that the price of living will no doubt continue to rise. Its just that at the moment some things just seem I little off balance.
Should I be looking to buy up small cars – I note they're plentiful!
You're right in suggesting that inflation will drive up prices for all assets, goods and services. The issue for those looking for property – as an investor – is to keep ahead of that inflationary curve, and produce some income.I wouldn't be too worried about the software engineer, he may be lousy at his job, and he may have bought a $2m apartment and struggling to pay the mortgage, no wonder. Might be a bad driver too.
Packer had to compromise – sold the QE3 to downsize to the $30m runabout last week, so it's all relative.
It's like these car ads where they say wowee it travels 1000 kms on a tank, yeah ? so how big's the tank ?You're all doing the right thing re the RE market – you're doing your due diligence as we speak, sharing and asking online, mining all your resources for info before making decisions. ChristianB is right on the money saying take note of the demographers, like Bernard Salt for instance, and supply n demand, true and simple, never fails.
Our nearly 10 years of hard work is coming to fruition over the next month, our motel is under negotiation for sale and buyers waiting, industry investor confidence is high, buyers are active again. And, we are looking to buy motel leaseholds with the freed up capital. So we're busy doing our due diligence as buyers too.
Hope you all do well in 2010.
Cheers
thecrestthecrest | Tony Neale - Statewide Motel Brokers
http://www.statewidemotelbrokers.com.au
Email Me | Phone Meselling motels in NSW
Can you convert the hotel rooms to strata … we are looking at doing a goldie conversion in Sydney at Hornsby … room cost $70k each rental $250.00 a week …..
wealth4life.com wrote:Can you convert the hotel rooms to strata … we are looking at doing a goldie conversion in Sydney at Hornsby … room cost $70k each rental $250.00 a week …..!! Are you serious?? This sounds very awesome w4l… are you converting the whole building or just one hotel room?
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Very interesting topic. Was about to start a thread related to all this, but seems it's already out there.
My concern was born about, due to the alarming stats posted on "The Morning Show" the other day.
Now, before I get knocked down in flames by all the Koshy knockers, i'm well aware of the pitfalls of taking stats too literally.
However, it was noted that most of the major centres in OZ (including Adelaide) fall inside the Top 10 of the "Most Unaffordable Cities in the World to Purchase Realestate". The honours of No1 goes to Vancouver.
This would tend to hint to me that property prices are due to fall dramatically so as to correct the market.
We all know about the big credit crunch that hit globally 2008-09, although Australia was largely left unscathed.
The concern for me then is when are we likely to experience this next "big correction" in the market? This year, next, never?
I'm currently in the due dil stage of a buy/reno/subdiv(build)/sell deal in Perth CBD. Given this latest sentiment, it's hard for me not to feel more than a little uncertain about committing.
On the other hand, the contrarians have rightly taken the view that, while the "doomsayers" are crying out no, get in amongst it and take action.
BTW, I believe I've been conservative in my number crunching, but then no amount of number crunching can compete with a burst in the property bubble.
Should I take it seriously? Happy for my pessimistic opinion to be knocked down in flames;-) Be interested to hear from others in the same position.Cheers all, Nigel
Hi Nigel
My opinion with your deal is, if there's space in the deal for all you costs and and extra 10% that may arise (unexpected costs) and still profit, it should be worthwhile.
I think Perth has had its correction. (Not that I'm very knowledgable about Perth real estate.
Feel bullish about the mining and resources industries.And you're not just looking to buy/hold long term, but value add.
So my gut says, go for it!
May end up better than you anticipate!quickchick
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