VIC Best Melb Strategy (600-900k)

Hi all,

A friend recommended this forum and I'm blown away by the amount of intelligent and helpful discussions.

I've read some interesting discussions on threads such as this one VIC - Best place to buy in Melbourne ~500-600k

I'm in a reasonably similar situation - 33 years old & my partner and I do not own any property. We've stopped ordering smashed avocados and are keen to evaluate our options. I've got a basic understanding of each strategy - IP vs PPOR vs rentvesting thanks to the PC forums.

Q1 - I'm wondering whether in Melbourne, there are any areas where it would still be possible to combine the 2 strategies and find a reasonable temporary PPOR with scope for 1-2 kids in the future that also represents good IP fundamentals? Complicating the matter is that work may take us overseas for 1-2 years in the next few years, so rental yield is important too.

We could continue to rent and perhaps ride out the tail end of the boom and re-assess when we return from overseas after any potential interest rate rises. But we've held off for far too long for various reasons and I'm hoping to not miss the boat, especially given that Melbourne's population continues to grow. Particularly inspiring is this recent article on Eric Wu From international student to multi-million dollar property investor

Our parents live around Doncaster, which has somewhat plateaued Doncaster, vic - Suburb Profile, Review
The aim is for a free standing house in the east / north / south, ideally with land which will grow that we can rent out whilst away and potentially live in or refinance in 5 years time for a PPOR family home later on.

Q2 - In terms of optimal anticipated growth, would it be better to get a 600 square block of land somewhere like Reservoir/Thomastown which may continue to boom for 600-700k vs areas that are hotter but have already risen significantly like doncaster/clayton that cost 900k+? I wonder if Doncaster will flatten out but these Northern pockets will continue to grow. Having said that I know friends who bought in premium suburbs like Glen Iris that have enjoyed significant growth are are completely out of our price range.

Q3 - Are very old places on large plots still worthwhile renting out until they can be developed in 10+ years time? How can one assess structural issues to make a property rent-worthy without a background in the area?

Thanks any feedback is much appreciated - hopefully I what I've written isn't too confusing!

 

Hi and welcome to the forum!

Its worrying when you start reading this line too often. Market tails are always driven by hype and FOMO, and the gains made in the tail are often lost soon after the boom peaks.

If you are buying to potentially sell within 1-2 years, your gains may be wiped out by the buying and selling fees and your increased holding cost would leave you worse off than if you just rented. Anyone buying at this point of the cycle should be thinking at least 5-10 years out (keeping in mind that flat markets can last 7 years), including scope for interest rate rises and what that means for your ability to service the loan. Market supply is now catching up to demand, so don't expect rents to be rising at the same rate as mortgage repayments.

My thoughts on your questions:
Q1: townhouses and fringe suburbs are in rising supply. I would look for green title houses (with backyard) surrounded by established infrastructure, as they are an asset that will become more scarce as population increases. I don't believe the ability to subdivide the block offers any advantage at this point, as most land value increases have been realised and apartment values would need to significantly rise for the land value to rise. A good starting point for what has some potential is to look at rental yields. If they are getting lower than the market average return, then the cost of property out-values what people are actually willing to pay to live there. This is also a consideration if you end up needing to rent it.

Q2: I don't believe the price increases in each area are too far from one another. Lots of bigger blocks in Resi are sellinng for 850+ and getting terrible returns. I've seen some sell for 870k and put up for $365/week a month later.

Q3: depends on your strategy. "Buy and hold", aka. "buy and hope" is typically more advantageous for people not taking a big loan, hence often referred to as "land banking" cash. Holding costs can be considerable, and even a 0.25% rate increase will have big impacts if you're tied to that property for 5-10 years.

So to sum up, it sounds like you've got a lot of change coming with work, kids, and are slightly unsure of what approach to take to your investment strategy. Given that we are at 5 minutes to midnight on the property clock and facing rate rises, perhaps its worth considering if buying is really the right option for you right now. Appreciated that you may miss out on small gains for the tail of the property cycle, but if things dont go to plan, you may find yourself overseas with 2 kids and the burden of dependence on weekly rent and the tennant stops paying... a stress that may not be worth the gains.

 

I don't know how long this cycle has got to run. It started in around late 2013/early 2014. We're now in 2017. Though I think it'll be a positive year, I'd be pretty careful about rushing in.

 

Hi JL1, wow....can I just say many thanks for an amazing and thoughtful reply.

I'll keep reading and researching whilst being wary of seminars as suggested in other threads. I am leaning away from rushing in unless an opportunity in a high quality zone arises that we can afford.

Great point, I've been tracking the train lines and school zones around Melbourne on realestate.com.au looking for areas which are affordable and may be a good PPOR for us (the 'call for price' is driving me nuts!). What sort of areas would you suggest looking at?

What sort of rental yield is optimal & realistic in a growth oriented strategy? From my observation, the hot post boom areas in Melbourne are around 2%. Whereas the mid-outer ring suburbs like Thomastown/Croydon appear to be around 3ish%

Very good point...without a crystal ball, it seems that sentiment on PC suggests that a rate rise may be due in the next 2 years or so? Is the rate increase impact on and old property mainly related to the lower rental yield?

There are some interesting threads on looking out for red flags indicating the end of the current property boom What to Avoid in 2017

I don't know a lot about property cycles other than the basics from PC & google, but are there any indicators besides house price to pick when the optimal cycle time to buy is in the eastern suburbs in Melbourne? If I did hold off for the next 2-4 years, I would aim to jump in before next cycle's boom. Part of me is slightly worried though that after we came back from overseas, properties would be again 20% more expensive. If property cycles last 7-10years, are we set for a flat period in the next 2 years?

Lots of work to do but getting really interested in it!

 

Given that I don't have kids and I focus north, i can't really give you a balanced call on this. My very bias view is that east/south are both priced out. The price divide between Reservoir and Thomastown/Lalor i think is excessive, and as you mention there is a big step up in rent return there. I like Lalor as it is lower crime than Thomastown. They are also the lowest price suburbs in that corridor, with even Mill Park further east commanding higher asking prices without the transport connection.

This is a hard one, because return typically lags interest rates slightly, but for the last 10 years rates have been falling so there has not been any 'real' upward pressure on rents. Once rates go up, returns will need to as well so either rent goes up (happens with supply constraint) or prices come down (happens when there is over-supply). Being that we are moving into an over-supply phase, there is a very real risk of price falls.

IMO the main impact is that people find it harder to service loans. the GFC was fuelled by loan defaults where people could not afford to service loans as rates rose (hitting 9% bank rate in Australia). a full 1% rise would add 25% to the cost of a loan, which is about on par with the increases that fuelled both 1980s and 2008 events.

Be careful with media talk on rate rises as well, as this current up-cycle we will see consumer banks and the reserve bank act out of sync and you need to be sure which one you're reading about. If the RBA drop rates there is no guarantee that banks will too. I read an article recently talking of the Australian banks' exposure to debt via America, and that American rate rises may also influence out of cycle rate rises in Australian banks.

I watch a lot of statistical indicators, including development approvals, population growth, and jobs growth. One interesting statistic is dwellings approved/built per new person. Most cities have between 2.2-2.6 people per dwelling, so once completions per person moves below 2, its safe to say the market supply will be increasing. minor shifts are normal, but big shifts can oversupply a market.

The below chart is from an old analysis I ran on approvals up to March 2016 (note this is a "smoothed" average, so peaks and troughs shown are less than actual).

What it shows is record under-approving in 2008 and high under-approving in 2013. Given that many of these approvals were apartments (more so than any other time in the past), the lead time to market can easily be 3 years. Recent peak underbuild was 2013/14, that is why many analysts see the market due for the wave of completions to start hitting now. Bear in mind this underbuild lined up with rapidly falling interest rates (falling cost of debt), so in the mean time we saw a starvation of property at a time of reducing debt. Right now, we have waves of completions and stable debt costs (if not rising).

Essentially this says there is enough market supply that there is virtaully no chance of pushing back to the 2.5-3 people per dwelling that sparks a boom.

Though there is more to it than that, this is the single strongest proof that property boomed when we lacked supply, and we are now entering oversupply so we definitely won't be seeing a repeat of the last few years.



EDIT: I'm actually completing my analysis of full year 2016 to advise my 2017 forecast. If you like, I'll flick you a link when it's complete (Feb 2nd on release of a final piece of ABS data)

 

Outer ring suburbs like Croydon(VIC) are great (actually used to be called Whitehorse Flats before the train came through).
If buying in central Croydon area a BP inspection is a must, I could walk you up Croydon Rd. & show you the handful of homes that have NOT had termite damage at one time or another. You need termite traps if buying in the area imo.
Croydon has now for the last two decades catered incredibly well for the under 18 youth, recreational facilities, skate parks & an u/18's music facility for gigs that is housed in the original Croydon Movie Theatre.
If you head south the other side of Eastfield Park the termite problems diminish, but thats into South Croydon.
The public transport there (bus) is as bad as it was 30 years ago.
In that area your BP needs to get under the house. It has a tendency there to have seemingless bottomless cracks open up in severe drought conditions that a dripping hose never seem to fill nor close, unfortunately brickwork sometimes follows the crack (so watch out).
That smallish residential area in front of the Primary school (south of Pandora crecent), was an old dumping area years ago, it was scrub back then & many trucks would pull up & just pour all sorts of stuff into the ground, used oil, battery acid etc I saw it all for decades.
The 5 second rule doesn't apply there in the backyard if you drop a snag on the ground off the barbie.
As busy as Eastfield Road is today,
I actually have Slides (that's before normal photographic pics for you young ones) of when Eastfield Road was a dirt road, with goats tethered to eat down all the blackberries growing everywhere.
It was also a dead end road in those days (it stopped short of Dorset Road).

 

IMHO - Non professional opinion here, but I'd rather purchase in a lower price range area with a decent sized block (600m2+) than one that has already boomed or reached a point where it's become unaffordable (pretty much most of the East and South East within 20kms).

I like Reservoir as well and I think that is one of the few remaining suburbs worth buying within a 15 or even 20 km radius but I think it is growing fast, real fast. A friend purchased a property in Reservoir in early Sep 16 for $700K (700m2) block with an old 60s BV home. He is living in it with his wife and daughter and has renovated it, I've been looking around the same area - roughly 1.5-2km from Reservoir Station. Asking price is mid 700Ks but honestly I think it may even hit 800K these days. Reservoir is growing fast - probably from the spill over effect of Preston and some Mainland Chinese buyers. I'm not sure $600-$700K will buy you much these days in Reservoir for a decent sized block.

My sister purchased a $710K 610m2 block in Clayton back in 2013, which I thought was probably $50K over what it was at market value back then. It's about 900m from the Clayton Station, her next door neighbour recently sold for 1mil.

 

Thank you again for your well considered reply. Very interesting stats. This stuff is gold. I know it's very hard to predict anything these days but it would be great to at least cover the basics of property stats beyond realestate.com.au. I've just ordered a book online too from bookdepository.
Do you have any suggestions for good independent & non-biased resources? I don't have an economics background.

I found this from google from Michael Yardney, I've never heard of him & wonder if it's agenda driven? Seems like good info though Australia’s Property Bubble: The Smart Investor's Guide

I used to work around Epping and I was under the impression it was the other way around with Lalor having a bit more crime. Things seem to be changing in Reservoir, is this also the case in Epping/Lalor? I also read that there are some developments around Fawkner.

Another area I'm looking at is Greensborough with the North-East link planned, it looks like that area is set to benefit? Pretty far from city though.

That would be awesome. Much appreciated - I'll look out for a PM.

Would you have any good data on suburb indicators that can be monitored? Of course there are so many variables in real estate that cannot be factored in to stats alone, but it would be interesting to know if using stats to guide buying & investing to estimate return value is helpful.

 

A friend of mine recently bought in Reservoir, it seems like a real hotspot on the forums and the Ksou graph is very linear unlike the already boomed suburbs.

I'm wondering what sort of indicators can be used to accurately appraise properties to assess whether something is under-at or over value? Is it just looking at the sold properties around that are similar? I'm very interested in how value can be extracted from the market, learning it before my first purchase and applying it later on.

 

I'll say it once and I'll say it again. Melbourne's North West is the most undervalued real estate in the state.
Get yourself a map, draw a a line directly out North from the CBD 25km, now draw one the same length directly out from the west.
Connect the ends of these 2 dots and shade in the inner area.

Buy within the shaded area and you will succeed.

For a fun little exercise, pick your top 5 suburbs in that shaded area, put a pin where they sit and note the median.
Now do a mirror of this exercise and pin the exact same point in the East and now compare the suburbs. Look at all the key indicators and see what you discover.

Just a little hint, expect to see almost double a median house price but apart from that I wouldn't expect to see much else difference except leafier streets.

Their is no sane answer to justify the enormous difference in house prices and soon enough the gap will close.

 

Its the water. People like water.

 

Michael Yardney is one of the bigger names in property advice. I looked in to him a while back as his stuff seemed to have some merrit. He lost me though when he was touting Brisbane as the best place to invest. I disagreed on grounds of falling population growth and rising development approvals. Now this year he's saying Brisbane is past it, not addressing the fact that he was a spruiker less than a year before. Definitely worth having a look at some of his free content to get a feel for what indicators different people watch, but take it all with a grain of salt.

I analyse ABS data and occasionally other data and post it on a little blog i run. I'm still learning how to write a decent article, but if you can get past my poor writing you'll get condensed ABS data and some explanation of the market trends i look at
OzPropertyCrunch

I check areas based on train station crime statistics, so your on the ground experience could be a better indicator.

For individual suburbs I don't have any reliable sources, so anyone that has one I would love to get hold of it! For me getting down to the suburb level involves a lot of trusting the gut. Some things i look out for though:

• rank of Melbourne's best schools
• crime maps
• news and media with mention of suburb specific statistics
• looking at development approvals and guessing which suburbs theyre in (in WA you can check each local council's assessments. Not sure if VIC has a similar thing)
• realestate.com.au. I pick a few key suburbs and do a search excluding surrounding suburbs and remove properties under offer, and look at the total available. Do the same search a short while later and see how much things change

I look at rental yields. To me, rent is a better indicator than buy price to assess how much it is actually worth to someone to live in an area in a specific type of dwelling. You dont hear of many properties returning yields in the 1%'s, so when a suburb is already down at 2% yield, further growth can only be justified if there is a good reason for rents to soar. I get a guage of yield by looking at realestate.com.au, and compare to similar suburbs (bearing in mind that more desirable suburbs will naturally have a lower rental yield than less desirable ones).

 

I never mentioned anything about the southern suburbs.
I am not sure "water" is high on people's wishlist when they are purchasing in the Northern suburbs.

 

Opposite of NW is SE. Thats the coast, towards Mornington peninsula. And because there is water there, people pay a big premium. Rich people attract more rich people. Virtuous cycle.

 

Checkout Pascoe vale/Glenroy/Hadfield. Pascoe vale is the most expensive but Glenroy and Hadfield (where i live and bought in 2014) has been gentrifying pretty quick and prices have been catching up to Pascoe vale. All the same post code, green suburbs, lots of park, transport is pretty good with a few train stations around (Upfiled line,Craigieburn Line ) and 12kms from the city so half an hour max car trip.

 

So let me get this straight just so I understand where you are coming from.

Let me pluck say "Ivanhoe" from the East which is 10km from the CBD North East and in current Google traffic would take 34 minutes into the CBD.
It is also 9km from Elwood beach and would take 31 minutes in current traffic.
The median house price in this area is 1.4million.

Let me now grab its Western counterpart which is roughly Maribyronong which is 9km from the CBD and in current traffic would take 31 minutes into the CBD.
It is 19km from Elwood beach and would take 40 minutes in current traffic (a whole extra 9 minutes).
The median house price in this area is 900k.

But lets say you like Williamstown beach? From Maribyrnong it would take 25minutes
From Ivanhoe it would take 50 minutes?

So you believe people who buy in Ivanhoe for 1.4mil do so for "The Beach" lifestyle???

 

To follow the median overall is a bit difficult as Reservoir is a very big suburb and there are many markets within markets in the suburb. Some areas like the oakhill estate, (oakhill avenue, northernhay, southernhay sell in the millions). Regent st, gilbert road, gilbank rd towards the preston market side are very expensive and you can see prices similar to preston. There're no Asians pushing up this million dollar prices as well (mainly greeks and Italians)

A lot of properties towards the reservoir train station has also been rezoned around broadway fetching 1.7 Mil, 1.1Mil. and similarly in plenty Rd which is semi commercial. There is a lot of development happening ard the area (redevelopment of preston market, 3 towers with shopping off 830 Plenty Rd, Redevelopment of Reservoir Train station, Northland expansion etc) so you can't go too wrong if you buy around the area.

There are good buys though - I saw this 349 Edwardnes St REservoier go for 550kish though some of the houses further into the edwardnes lake area faces factories commercial area etc.

there are also a lot of older ex-housing commisison houses being sold off around the area which are cheaper but they can fetch high prices too like in winter crescent nearly achieving 800K for 600sqm block. A lot are being torn down and rebuild with townhouses etc. Not much different to some parts of northcote or thornbury etc in terms of look and feel. i have spend a year attending auctions in this area reservoir, kingsbury, preston, bundoora.

I would stay away from one area though - it's at the intersection of strathermon and boldrewood (like super big triangle housing commission area). it's a bunch of flats etc around 12-14,000 sqm.

 

Balwyn, doncaster, box hill etc are no where near water (mountain views though)

 

Asians love schools and shopping centres.

Aussies love the water front and large blocks of farmland.