Dear Property Investors,
I would appreciate your comments in relation to the following recent articles published on housing affordability;
We currently own 3 investment properties which were purchased between 2003 & 2005 using 100% finance + equity in our PPOR. Unfortunately due to bad timing these properties have NOT increased in value and based on media articles property ‘experts’ opinions do not expect any significant growth in the forseeable future….
Based on historical trends we purchased the properties in the hope they would double in value within the next 10 years or so thus providing us with a comfortable retirement (in 15 years time).
We are currently outlaying about $15k per annum to hold these properties each currently valued around $330k.
Over 10 years this cash outlay will total $150k+.
It will take capital growth of 15% over 10 years for us to just maintain our current position!
To get ahead financially we will need capital growth of 30%+ over 10 years ($100k+ per property in 10 years) as opposed to investing the $150k we would have saved in over this time.
If current “Severley Unaffordable” housing reduces the number of prospective buyers wont this keep house prices down & prevent future property ‘booms’ from occuring within the next 15 years+?
To achieve a “Moderately Unaffordable” Median Multiple 3.1 to 4 the Average Household Income (currently around $50k – $60k p/a) would need to increase to approx. $100k p/a. When will this occur?
Therefore why am I investing in property now?
Can anyone give me a ‘reality check’ please!
JamesWylieMember@wylieJoin Date: 2004Post Count: 346
Would be interested to know where your properties are to give everyone reading an idea of why they have not increased in value since you bought them.
Could you post the suburbs to give us some more info?
The other factor about the cost to hold them wouldn’t worry me at all if they have a chance of making good capital gains. We are in exactly this position with substantially more holding costs but quite comfortable that the values will increase over and above our costs, albeit it may take some time.
The properties are single storey 26sq 4 bedroom homes on 620-650sqm lots located in Victoria’s South Eastern Suburbs;
2 in Berwick
1 in Narre Warren South
I wonder the same thing.If housing is so unaffordable for middle australia. What chance do we have of a housing recovery. Recovery to me means increase in house values but this will make housing less affordable and therefore less people will by so to me that would drop prices. My head hurts[glum2]dare_to_dreamMember@dare_to_dreamJoin Date: 2006Post Count: 88
Firstly congratulations on taking the step to buy three investment properties. I believe that the buying costs to buy the properties and the high selling costs you pay to sell the property makes it not worth selling the property unless you absolute have to. You would probably pay $10,000 + commision to sell the property which makes it not worth it.
Also, in 10 years you would have paid 20+% of the property off and the rental yield would have inevitably improved which may turn the property cashflow positive.
I would definitely be holding the properties now you have invested a lot of money into the properties.
After reading those articals it freaked me out a bit so i crunched the numbers again on mine
loan repayments,rates,insurance, $455 per week
rent $250 Tax $180 Total $430 per week
That leaves me $25 out of pocket and with future rent increase potential and tax fine tuning it will have no financial burden on me so to me it is a good time to buy and hopefully see a capital gain down the road. I guess the trick now is you cant just look at areas as a whole you must look at specific bargains to make money or atleast not loose any over the next few years.
PS >i have little to no investment expieriance its just what i am picking up on this site.L.A AussieMember@l.a-aussieJoin Date: 2006Post Count: 1,488
In1989 the interest rates were approaching 17% across Aus. People were selling homes worth $1 mill for $500k. It was bad if you were a property investor (or high-end home owner). The market was bad with no sign of recovery in the near future.
Then we had a boom in the late 90’s through to 2003. Houses doubled in price in 3-5 years. The same thing has just happened here in L.A. Houses doubled and even tripled since 2000, while in 1990 they couldn’t give away the properties! Now they are going through a slump as the affordability has deteriorated.
You bought your properties at the top of the boom, or maybe the start of the downturn. No big deal; it just slows down your progress. You are only guilty of a bit of bad timing, but the market always recovers if you wait a bit. The important thing is that you are in the game with THREE I.P’s. That’s more than 95% of the planet!!
All you need to do is ride out the current stage of the never-ending cycle; in 5 years you will be high-5ing each other over the smart thing you did.
I am a big fan of Neil Jenman, but he is a bit of a gloom and doomer; he is trying to protect the uneducated from disaster and I applaud him for it.
In 10 years time the areas you bought in (which I am very familiar with) will be part of the inner suburbs as the urban sprawl continues. I remember when Scoresby road, Stud road were the end of civilisation! I bought a house in 1985 in Boronia for $93k – it was the end of the trainline practically, and an area for first home-owners and losers (it was all I could afford). Now those houses are all high 200’s and more, and Boronia is still miles from the action.
Your houses will go up – not 10% per year for the next 5 years, but maybe 50% over the 5 after that. That’s how property cycles and markets go.
You will retire very comfortable.
“we get sent lemons; it’s up to us to make lemonade”WylieMember@wylieJoin Date: 2004Post Count: 346
I know not everyone agrees but I am of the school of thought that property will double about every 7 to 10 years. I bought my first IP nearly 30 years ago (I am 46) and have watched three cycles. I don’t think things will be any different from now on, and if it were me, I would hold onto them if you can afford to.
Even if they never go up in value (don’t believe it for even a minute), your rents will and your loans will go down.
Every time we have sold a house, we have regretted it, even though it was necessary to consolidate debt and for living expenses with three growing boys and school fees etc. The choice for us was for me to go back to work or sell a house. We chose to sell a house which was the right decision for us.
If you retire in 15 years I reckon those houses will be worth a lot more then than now. I don’t know the suburbs but unless they are lemons, you will be sitting pretty, in my opinion.
I know a family with many IPs who decided to sell them all up just before the last Brisbane boom and put their funds into shares. I know that they will have done very well in shares, but their (guessing here) $2M portfolio of houses would certainly be worth more than $4M now if they still had them because the houses were in good inner ring suburbs.
Maybe their shareholdings are worth that much now, don’t know.
WyliectaingParticipant@ctaingJoin Date: 2006Post Count: 111
Hi James62, I’d love to be in your position to have done so well, albeit this is a trying time.
You have the wisdom to ask and those before me have given you their honest opinions. I do believe now property investing is for the long haul, sell only as a last resort. Revisit your goal and affirm your plan to wipe out negative noices around.
For a quick pickup, Jan Somers book on Building Wealth Story by Story (again availalble in good libraries) is quite inspiring without gimmicks.
CTHookhamCMember@hookhamcJoin Date: 2007Post Count: 83
All I want to add to the comments that have already been made is that we should not forget that the baby boomers (investors) are about to retire and that will have an effect on pricing. How that effects you is related to how you invest and what you invest in.
All the best!
[cigar]wilroseMember@wilroseJoin Date: 2006Post Count: 21
to HookhamC: what are you driving at with this last post?
Thank You all,
I appreciate all the positive comments which reaffirm the reasons I started this journey in the first place.
Yet I still feel that no one has addressed my question on current (& future) affordability issues as reflected by devo76…I wonder the same thing.If housing is so unaffordable for middle australia. What chance do we have of a housing recovery. Recovery to me means increase in house values but this will make housing less affordable and therefore less people will by so to me that would drop prices. My head hurts
My loans are interest only & I am relying on high depreciation claims over the first 5 years (all 3 properties were newly built) so I do not expect to be in a position to pay much off the principal in the short term.
I am therefore heavily reliant on capital growth to get ahead.
Are there any factual reasons why property WILL double in value in 7-10 year periods?
Surely there must be a saturation point where property becomes too expensive? A property worth $300k today increasing to $1.2mill in 20 years would require a combined income of approx. $250k+ to qualify for finance (with a deposit of $300k = 20% + costs).
Have any of our more ‘experienced’ investors gone through any periods of low affordability in the past? If so how did the ‘property cycle’ over come these issues?
Maybe there is no answer….maybe historical returns ARE a indication of future returns (unlike most financial planners are prepared to say!)…never the less I still get the feeling we all are investing in HOPE to some degree…bit like winning Tatts!
Jameskum yin lauMember@kum-yin-lauJoin Date: 2006Post Count: 342
Hi, my five cents worth.
Has anyone noticed Adelaide prices spiking 10-20% in February 2007 ACROSS ALL SUBURBS?
I work numbers based on current value and NEVER work on the assumption that they increase 7% every year.
Lack of affordability in itself has no power to control the price of housing. Only the production cost can do that. I was young once and POOR. House prices did not obligingly come down so I could afford. Our young friends today cannot afford to buy a house each.
The question is this: do they still need to live in a house? If they built their own, how much would it cost them?
House prices can come down only if someone out there wants to sell below cost.
James, it costs you $15K to hold your investment properties. If your tax bracket is 47% then it costs you nothing basically.
Having said all that, it doesn’t mean that the risk is less. I watch the rental vacancy figures like a hawk. All the breath left me when in Adelaide last month, it was 0.83% and the month before that 0.5%.
James, what is the vacancy rate in your part of the world? Do some forward forecasting & then make your decision.
I told my accountant I’d far rather pay interest than tax & she gave me a strange look!
Good luck to everyone,
Thanks Kum Yin,
Just to clarify;
I am in the 31.5% tax bracket & the $15k p/a I am outlaying is after tax rebates & all expenses.
I expect this outlay to increase in approx. 2 years when my fixed rate loans @6.50% expire & depreciation claims drop. Hopefully rent increases may partly offset this.
We are by no means doing it easy…we are living a very ‘simple’ lifestyle to afford these properties…just breaking even at present.
I am uncertain what the vacancy rate is exactly; I suspect < 1.5% as finding tenants in this area is not a problem.
My main concern is whether losing $15k p/a will be offset by capital growth over the next 10-15 years. If it doesn’t I will be very disappointed!
You are worrying about the same things i do and i get the feeling no one will be able to tell you something to make you feel better.Its a gamble on something that we are uncertain about.If realestate was certain we would all be rich.I too would like to know if some point in the past we have had similar unaffordability in housing and if so how did the market recover.
PS Exchanged contracts on my IP yesterday and found out today that my place of employment may be closing up in two months.Im in a specific feild and more work means moving interstate. Not a good day for me.[angry2]kum yin lauMember@kum-yin-lauJoin Date: 2006Post Count: 342
Hi James, woo… 15K after on paper losses can be serious -ve gearing over time.
Either 1) pay down the principal [this is doing the hard yards]
2) sell @ small loss/ affordable loss
Long ago, with my 1st house, prices went seriously backward & stagnated for 5-6 years. I know now that I should have taken a loss but at that time I was young & totally afraid of losing my pride.
I busted my guts to pay off my debts, seriously affecting my mood & my social life. Eleven years later, I sold at double the price I paid. I sat myself down and asked “What did I gain?” The answer was startling! “I gained a loan facility.”
2 years later, I thought house prices in Adelaide had stagnated enough. I borrowed from private lenders at high interest, went away & worked 16 hours a day to pay down the loans.
It’s now entering the 8th year of my property investment here. I’ve borrowed a couple of million and am still scared witless. But I also have over a million worth of equity.
I’m sorry you have to make a tough decision about where your property investment is heading.
Wishing you all the best,
Kum YinmillionsParticipant@millionsJoin Date: 2005Post Count: 355
I’d consider buying another 1 in an area that is currently growing. High population growth, but affordable suburb. Maybe another state? Regards LindapicklesamParticipant@picklesamJoin Date: 2004Post Count: 55
there’s this quote from this couple who have property worth $6mil plus in a magazine i read, they said those doom and gloom theorists DO NOT own any investment properties…
Also you just don’t know who to believe, i watched this report on the ABC and the guy said demand for housing is up, but housing approval have dropped, therefore rents and prices will go up…and on the same day an article in the paper said the whole sydney market’s going to be flat for the next 10 years…
i don’t really have a problem with slow growth, as long as interest rates dont go thru the roof i’ll be right..even if i dont make any $$$, i’ll still end up with a house or 2…it’s just safer than shares…
but one thing is certain, population will ALWAYS increase…more people means more demand for houses…ctaingParticipant@ctaingJoin Date: 2006Post Count: 111
Just quoting Michael McNamara from latest Home Price Guide regading Melbourne properties in general:… Whilst any growth in new housing remains stunted, there will be growing pressure on rental markets. Strong migration patterns have brought over 100,000 new migrants per annum to Australia in 9 out of the last 10 years. Simply, new housing is not being built at a level to satisfy our bourgeoning population. Parents are no doubt feeling the burden of this as their (ahem) children stay home until their late 20s. Rental vacancy rates are less than 2% nationally indicating that demand for rental accommodation will push rents even higher.
A renewed focus is required to take the pressures of soaring rents and higher house prices in our urban markets. Governments need to encourage the de-centralisation of our cities with better infrastructure spending. The new housing sector also requires the tax relief to create more affordable housing not only in outer suburban markets but also in inner urban areas where the demand is growing most strongly.
I believe his explanations should relief some concerns; but it may never lay the topic to rest. It’s just too hard for some of us to ignore returns on achievable with the other asset class that is doing all too well right now.
We need to take heart and do our due diligence.
CTfoundationMember@foundationJoin Date: 2005Post Count: 1,153Originally posted by ctaing:
Just quoting Michael McNamara
I believe his explanations should relief some concerns
I discussed this article briefly with Mr M over on cracker…
He made some qualifications, particularly of the areas you quoted.