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Oh Happy Day; Rents to the moon, up 10% +++
Topic Started: 2 May 2012, 03:18 PM (7,521 Views)
miw
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genX
3 May 2012, 07:21 PM

Confusingly for you, miw has correctly pointed out that there is another factor in the rental price in some areas, that relate to particular characteristics of that area. For example, in North Sydney, it is close to two of the highest economic activity CBDs in Australia. In certain mining towns as miw mentions it is because of an exodus from surrounding towns whose geography puts them at a disadvantage for access to local jobs.
Hmm. The mining town factor is an outlier. I am hearing stories of $1500/wk rents on houses that would have cost about $150k or less 5 years ago before coal-seam gas. But even without that factor, there is what I call the "boonie factor". Rental yields in Brisbane have always been higher than in equivalent suburbs in Sydney, for example.

For country-town boonie, I was thinking more the case of the regular hick place that isn't dying. In Queensland, at any rate, if you drive along a country highway every second town is dying. I am told that this is all according to a secret master plan that was drawn up in about 1960 on the basis that you no longer need a town every 25 miles and the population is migrating to the city. (I have not seen the plan so cannot confirm its existence)

So take the case of a town that I know - Mundubbera. Mundubbera is pretty stable to slightly growing population-wise, but not booming. No mining or gas. The next-door towns are all shrinking and some of that shrinkage is coming to Mundubbera. When they closed all the bank branches and the post-office next-door, people who used to go next-door started going to Mundubbera instead because it still had banks and a post-office and a full-time doctor and a vet, etc. Land is very cheap in Mundubbera, as you can imagine. Also there is very little business case to build anything new so rentals are tight. It is quite possible to buy a house for $100k and rent it out for $150/wk. But capital growth is very very slow so in 10 years' time you probably still would have been better off buying in Brisbane or Toowoomba.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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K-town
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audas
3 May 2012, 02:29 PM
No it makes perfect sense - have a massive war chest at the ready to buy, buy,buy once prices drop by 40% as the wise and intelligent amongst us always thought they would.
Why didn't you just buy when prices were 40% lower. It wasn't that long ago. Must have a pretty sweet job & frugal lifestyle to build up a massive war chest in that short time.
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genX
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K-town
3 May 2012, 08:18 PM
Why didn't you just buy when prices were 40% lower. It wasn't that long ago. Must have a pretty sweet job & frugal lifestyle to build up a massive war chest in that short time.
Well .... according to this (APM data, take with salt), as of (Dec 11) Sydney median house price is $636,822

So ... $636,822 * 0.6 = 382,093.2 and the last time Sydney median house prices were 382,093.2 was 2001, which is 11 years ago, give or take. So if you saved 10,000 a year for 11 years and invested it at an average interest rate of 6.7%, you would have a warchest of $165,910.41. And that's pretty conservative.

So, what was your point again?

Edited by genX, 3 May 2012, 09:02 PM.
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K-town
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genX
3 May 2012, 09:01 PM
Well .... according to this (APM data, take with salt), as of (Dec 11) Sydney median house price is $636,822

So ... $636,822 * 0.6 = 382,093.2 and the last time Sydney median house prices were 382,093.2 was 2001, which is 11 years ago, give or take. So if you saved 10,000 a year for 11 years and invested it at an average interest rate of 6.7%, you would have a warchest of $165,910.41. And that's pretty conservative.

So, what was your point again?
That the poster probably doesn't have a massive war chest.

$165K isn't a massive war chest even if prices did drop 40% imo.

And did you pay tax on that interest?
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jester77
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miw
3 May 2012, 06:59 PM
If indeed Audas has a massive war chest, he is probably sensible to hold onto it for the nonce.

While the market is showing some signs of life, I'm not sure I would bet any amount of money on it moving in either direction. It's so finely balanced that any bet right now would be gambling.

Sitting around and waiting for a 40% drop is *probably* unrealistic wishful thinking. But holding onto your cash and waiting for the market to prove its strength is simply prudent at a time when term deposits are earning a higher rate of return than capital return on housing.

According to my back of envelope calculation, based on an assumption of 6.3% mortgage rate, 2.5% rental yield (ex interest, ex capex and purch. expense) and 5.5% 12-month term deposit rate, you are better off holding cash if your view of the next 12 months' value growth in the property is anything less than 3%.

But in a month, I reckon you will be struggling to get 5.1% on your term deposit, so if you put off for a month the decision to lock away that cash, then you would be better-off buying now if your view of prop-price increase is anything over 2.6%.

Fast forward to August, and there has been another 25bp cut in interest rates, banks give 18bp to mortgage holders and take 25 from depositors, so your mortgage rate is now 6.12% and your term deposit rate is 4.85%, and you only need to have a view of price growth of 2.2% in order to make the decision to buy now more attractive.

Negative gearing can lower the decision bar just a little bit, but no amount of negative gearing or interest rate reductions can make buying now a sensible proposition if your view is that property will be cheaper in 12 months. The exception to this is if 12-month deposits get you less than rental yield, in which case it may be a long-term proposition to buy now if you don't have to borrow money, but purchase costs make that very dicey. Note that 12-month CDs in the US get you way less than 0.5% so it is not totally outside the realms of possibility I guess.

Right now, it is hard to make a business case to buy a property for investment. In fact it has been hard since about 2008. Investors are essentially out of the market, and house prices are basically being driven by owner/occupier demand alone which, unemployment being stable, to me gives a mid-term expectation of approximately CPI growth or maybe a smidge more at best until the investors come back or the lack of construction constricts supply even more. At current yields and economic conditions, that would be after another 50bp of interest rate cuts.

On the other hand, if you are in a property now at any sensible gearing ratio, with yields rising and carrying costs dropping, it is hard to make the case to sell the damn thing and get a term deposit because the transaction costs are so high.

If prices stay stagnant or drop, then yields will go up and make the business case easier. At some point the lines will cross.
A significant rise in unemployment will push the business case the other way because the owner/occupier demand line will drop.

It's easy to make all kinds of empty predictions if it's not you but some other guy who makes or loses money. Personally, I am cautiously positive about property prices for the rest of the year, but I'd be waiting for another 50bp interest rate cut or a 2-3% rise in the index before I got into the market as an investor.

If you disagree with me on that, then I have this property for sale in Brisbane.... (And I'm gonna realy piss the Real Estate Agent off by actually raising the listing price later this month because the equation for keeping it gets more compelling by the month)
This is a great post imo, and pretty much sums up my position. Banging on about how rich you are from buying property is redundant at best, pathetic at worst. People have made money doing all sorts of things, doesn't mean its a great time to do them now. The reality is no one on here knows what will happen, and high unemployment is a real possibility.

No FHB with any sense would buy property now imo. It remains a massive commitment for average wage earners such as myself. I only earn 70k a year and have a very modest deposit of 80k, so jumping into to a 2-300k mortgage in the current climate is just way too risky. I'd rather focus on shares. Yes they are risky too, but I don't need to leverage to buy them.
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TED BULLPIT
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miw
3 May 2012, 06:59 PM
If indeed Audas has a massive war chest, he is probably sensible to hold onto it for the nonce.

While the market is showing some signs of life, I'm not sure I would bet any amount of money on it moving in either direction. It's so finely balanced that any bet right now would be gambling.

Sitting around and waiting for a 40% drop is *probably* unrealistic wishful thinking. But holding onto your cash and waiting for the market to prove its strength is simply prudent at a time when term deposits are earning a higher rate of return than capital return on housing.

According to my back of envelope calculation, based on an assumption of 6.3% mortgage rate, 2.5% rental yield (ex interest, ex capex and purch. expense) and 5.5% 12-month term deposit rate, you are better off holding cash if your view of the next 12 months' value growth in the property is anything less than 3%.

But in a month, I reckon you will be struggling to get 5.1% on your term deposit, so if you put off for a month the decision to lock away that cash, then you would be better-off buying now if your view of prop-price increase is anything over 2.6%.

Fast forward to August, and there has been another 25bp cut in interest rates, banks give 18bp to mortgage holders and take 25 from depositors, so your mortgage rate is now 6.12% and your term deposit rate is 4.85%, and you only need to have a view of price growth of 2.2% in order to make the decision to buy now more attractive.

Negative gearing can lower the decision bar just a little bit, but no amount of negative gearing or interest rate reductions can make buying now a sensible proposition if your view is that property will be cheaper in 12 months. The exception to this is if 12-month deposits get you less than rental yield, in which case it may be a long-term proposition to buy now if you don't have to borrow money, but purchase costs make that very dicey. Note that 12-month CDs in the US get you way less than 0.5% so it is not totally outside the realms of possibility I guess.

Right now, it is hard to make a business case to buy a property for investment. In fact it has been hard since about 2008. Investors are essentially out of the market, and house prices are basically being driven by owner/occupier demand alone which, unemployment being stable, to me gives a mid-term expectation of approximately CPI growth or maybe a smidge more at best until the investors come back or the lack of construction constricts supply even more. At current yields and economic conditions, that would be after another 50bp of interest rate cuts.

On the other hand, if you are in a property now at any sensible gearing ratio, with yields rising and carrying costs dropping, it is hard to make the case to sell the damn thing and get a term deposit because the transaction costs are so high.

If prices stay stagnant or drop, then yields will go up and make the business case easier. At some point the lines will cross.
A significant rise in unemployment will push the business case the other way because the owner/occupier demand line will drop.

It's easy to make all kinds of empty predictions if it's not you but some other guy who makes or loses money. Personally, I am cautiously positive about property prices for the rest of the year, but I'd be waiting for another 50bp interest rate cut or a 2-3% rise in the index before I got into the market as an investor.

If you disagree with me on that, then I have this property for sale in Brisbane.... (And I'm gonna realy piss the Real Estate Agent off by actually raising the listing price later this month because the equation for keeping it gets more compelling by the month)
You seem like a half smart smartarse. ;)
While I agree with a lot you have say ,you showed me just how much you dont know when you said you dont know which way you would put your money, on houses going up or down.
You are confused, they are coming down like never before , but you are unsure and have shown the depth of your intelligence ;)
Edited by TED BULLPIT, 3 May 2012, 10:09 PM.
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genX
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Quote:
 
That the poster probably doesn't have a massive war chest.

As you haven't specified what constitutes 'massive' I'm still not sure what your point is.
Quote:
 
$165K isn't a massive war chest even if prices did drop 40% imo.

It's ~40% of 385K, which changes your leverage from 97% to 60%. That would be good enough for me, but obviously you think different.
Quote:
 
And did you pay tax on that interest?

Probably, at the top marginal rate, but then again, I have other deductions. I'll take the top marginal rate for you.
$131,578.27 which is around 34% of 385K, making the leverage 66%.

On the other hand, 10,000 per year is pretty conservative. I've saved 10,000 in a year when I was on a salary of 54K, had one toddler, one infant and one wife to pay for. Renting was so cheap compared to paying off a mortgage. In recent years I've saved closer to 30K per year. In fact it's only in the last 12 months that inflation and rising rent has started to bite into my savings rate. If houses drop 40%, I am definitely a buyer, assuming I still have a job.

So maybe the poster you were responding to doesn't have a 'massive' war chest, but it's not like it's infeasible.
Edited by genX, 3 May 2012, 10:15 PM.
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earthsta
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K-town
3 May 2012, 08:18 PM
audas
3 May 2012, 02:29 PM
No it makes perfect sense - have a massive war chest at the ready to buy, buy,buy once prices drop by 40% as the wise and intelligent amongst us always thought they would.
Why didn't you just buy when prices were 40% lower. It wasn't that long ago. Must have a pretty sweet job & frugal lifestyle to build up a massive war chest in that short time.
Not hard if you know what you're doing, to outstrip the housing market :tu:
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stinkbug
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earthsta
3 May 2012, 10:32 PM
Not hard if you know what you're doing, to outstrip the housing market :tu:
Heaps of the property market is shit that you'd never buy as an investment. Excluding these alone puts you ahead of the market.
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While it's true that those who win never quit, and those who quit never win, those who never win and never quit are idiots.

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miw
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jester77
3 May 2012, 09:57 PM

No FHB with any sense would buy property now imo. It remains a massive commitment for average wage earners such as myself. I only earn 70k a year and have a very modest deposit of 80k, so jumping into to a 2-300k mortgage in the current climate is just way too risky. I'd rather focus on shares. Yes they are risky too, but I don't need to leverage to buy them.
Yeah. It's a difficult one. I deliberately didn't say anything about FHB in my post because buying a home to live in is a completely different pocketful of rats. From a purely economic point of view, it rarely makes sense to own the place you live in. From a quality-of-life perspective, depending on your outlook on life, it may still make a hell of a lot of sense.

I remember when I got my first place, it was a step down from the places I had been renting, but the feeling of never having to deal with another scumbag landlord (ok they weren't all scumbags, but how can you tell in advance?) or deal with a property agent (they never have your interests at heart!) or worry whether the lease could be renewed and at what rate was worth a lot of money to me. To others, it may not be a big deal. Right now I am renting again and I hate it, at least when the lease renewal negotiations start.

And for someone buying a place to live in, the equation is a bit different. If you assume that once you buy, you are not going to rent again, it becomes a risk/reward based on whether you can manage the financial load. The price might go down a bit, in which case your next trade is cheaper, or it might go up, in which the next trade is more costly. The home you live in is not really an asset because it will always be costing you money one way or another.

But if I were looking to buy my first house right now I'd probably be sitting on the sidelines too. A mortgage that causes financial stress is just trading a scumbag landlord for a scumbag banker. The risk of a really dramatic move upward is slight and even term deposits will keep your deposit ahead of the curve (just) after tax. Good luck with the shares and keep the stop-loss orders up-to-date.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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