apartment rent versus buy equations

Discussion in 'Investment Strategy' started by patins, 31st Oct, 2017.

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  1. patins

    patins Member

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    1. if we had a fully balanced market with NO speculation for capital growth, shouldnt the property prices be just as high until the underlying mortgage equals the rent it could yield, or is this equation missing a fundamental component? (if rents went up but not property prices/mortgages, new properties would be built using cheap mortgages so rents would go down again by higher supply and so on)

    2. are rents in sydney by the same amount higher compared to brisbane as their pricing tags for real estate are, assuming both markets are aproaching the bottom of their property cycles (this should rule out the speculation on capital growth; i know sydney is approaching its top while brisbane somewhere at the bottom, disregard this please for now), or am i missing another fundamental aspect in this equation?



    3. as migrating german, i never heard of brisbane before i came to australia (in fact, its the only city i skipped while backpacking up the east coast years ago.. ). is this international recognition the main reason for sydneys and melbournes ever lasting capital growths or high wages levels, or are there other more important fundamentals (state legislation for example, or cooler pleasant climate) ?

    4. how would property cycles in sydney/melbourne once they turn down effect prices in the gold coast, i. e. those vendors who were still able to cash in at high levels in the south wouldnt surely catch a falling knife and would better be off buying apartments in the GC i assume? can a downturn in one region really cause a significant rise in another, because this really sounds like as if GC would only be a subordinate market depending on the misfortune of others.. i have read this a few times now (but positively stated..)
     
  2. jaybean

    jaybean Well-Known Member

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    I just want to address #3 (where you'd never heard of Brisbane before) with a few points of my own:

    3.1) Despite what a lot of locals would like to think (I count myself as one of them, having lived there for a long time and with lots of investment there), I don't think this is going to change any time soon. I'm talking about a 10-20 year time frame. I honestly think the only thing that would change this is if it were to be host to an Olympic games or there was a massive, massive incident (9-11 level attack). Brisbane isn't and simply won't be on anyone's map for a long time to come. There is nothing at all on the radar that would make me thing some random guy in the middle of say, Poland, is suddenly going to know Brisbane even exists in the next few years. Not. Going. To. Happen. That being said...

    3.2) Sydney has not always had higher growth. There have been a few cycles where Brisbane has outperformed Sydney (in relative, not absolute terms...granted, in investing, 99% of the time relative terms are the only ones that matter).

    3.3) Brisbane simply has an image problem. A lot of my Melbourne and Sydney friends are just snobby towards Brisbane, they think of Brisbane as being full of rednecks...not somewhere a young professional would aspire to be. Is it fair? No. Is it true? No. But perception is reality. That being said, I think this domestic image is more likely to change in the short term compared to our international image (see 3.1 above).
     
  3. The Y-man

    The Y-man Moderator Staff Member

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    It's more commercial than that. Historically, ships were our main international carriers ~ and the main thing the non-indigenous came looking for was a safe harbour. Sydney harbour and Port Phillip Bay / Yarra in Melb are great for oversize ships. Brisbane is harder to navigate into - much shallower.

    Melbourne and Sydney then became financial powerhouses as a result of the Gold rush in the mid-1800's. They both argued to be the capital of Australia - in the end a little town halfway between was created as a compromise....

    The financial headquarters of major multinationals are therefore based in Syd or Melb (with the odd exception like Virgin and Domino's in Bris, or major resource companies in Perth)


    The Y-man
     
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  4. The Y-man

    The Y-man Moderator Staff Member

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    Consider the ability of renters to pay - ie their wages.

    The other critical thing missing is the sub-markets.

    Sydney, Melb and Bris (to a slightly lesser extent) have incredibly variable markets inside them.

    The Y-man
     
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  5. patins

    patins Member

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    Can you rationalize "sub markets" a bit more?
     
  6. Colin Rice

    Colin Rice Well-Known Member

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    Micro markets or markets within the overall market.

    Some suburbs or clusters of suburbs buck the general trend aka sub market.
     
  7. Sackie

    Sackie Well-Known Member Premium Member

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    Sub markets is often where the hidden money is at.
     
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  8. JDP1

    JDP1 Well-Known Member

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    Correct. It's well known that Brisbane has a huge brand equity problem. It's probably 1/3 of Sydney if I have to guess on a domestic stage and much worse on an international stage.
    The government here ( both bcc council and state) is trying to change that.
    It takes a long long time...

    Till then, it's 4X beer and wife beater singlets for us....:)
     
  9. The Y-man

    The Y-man Moderator Staff Member

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    Yes it will depend on the rent.

    The key is the "rent it could yield" - does not rely on mortgage alone. It brings into consideration location, desirability of the building, fitouts, financial stability of tenants, length of lease.... which are all the things that come into a valuation for commercial property,

    HOWEVER......... the other thing in the equation is - what about people who buy a place for themselves to live in? While an investor might only pay X times rental yield, a home buyer might be willing to pay waaaaaaay over for emotional reasons. This is where the pricing for residential gets all complicated - driven by emotion.

    The Y-man
     
  10. The Y-man

    The Y-man Moderator Staff Member

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    Yup - in Melbourne we have some suburbs cold and falling, other shooting up meteorically, and when you take an average it's gently upwards......

    The Y-man
     
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  11. Anthony Brew

    Anthony Brew Well-Known Member

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    If there was no such thing as growth, then yes rent would align with yield and you can even see that today as yields across the whole country have dropped since the interest rates have dropped from back in 2012. I saw a paper on this showing 30-40 years history where yields very closely aligned with rates the whole time. yields follow interest rates, but there is a short term (year or two?) lag and this short term lag is exacerbated by the position in the property cycle.

    The current cycle is about 16-17 years length. Please take a look at all of Syd/Mel/Bris/Perth going back that far and you will see that the previous boom of Bris/Perth absolutely destroyed the current Sydney/Melbourne boom. I mean it totally blew it out of the water. Property tripped in value, this time around Sydney just barely doubled. also there has been comments occasionally from a few people who were investing back early in 2000's and Sydney was apparently very out of favour towards the end of the first decade much more than Brisbane is now. I think that answers your question of "is this international recognition the main reason for sydneys and melbournes ever lasting capital growths". they certainly are not everlasting if you look back more than 10 years. Actually from precisely 10 years ago now is the exact point that will totally obscure your ability to see the reality of the big picture. please find some longer term data and your entire understanding will change.

    Good question about how the current syd/melb boom will affect bris. Curious to hear what others say. I think fundamentals will apply such as population changes and jobs, but also the concern of APRA and interest rates being so low and only one way to go. Can not imagine how it won't correct eventually though. It's not like Brisbane is a town with 50,000 people with one industry.
     
  12. Zoolander

    Zoolander Well-Known Member

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    Collins class subs are the best at finding hidden money and gold at the bottom of the sea yarrgh