Expert Bust #27 Overheated Suburbs

Discussion in 'Investment Strategy' started by datageek, 29th Jun, 2021.

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  1. datageek

    datageek Well-Known Member

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    I've heard some investment professionals suggest that a market is "too hot" or "overheated". It becomes clear that demand exceeds supply in the markets they've mentioned, when I look at auction clearance rates, vacancy rates, stock on market, selling speed, discounting and a whole bunch of other metrics.

    One of the symptoms they often quote is that buyers are paying "too much" i.e. above "fair market value". I don't see a problem with this. In fact, capital growth can't occur unless most buyers are paying above fair market value - that's what growth is by definition.

    But could there be some Goldilocks middle ground that the 400-year old law of supply and demand hasn't shown all those economics professors?

    [​IMG]
    I've been scoring suburbs on their supply and demand for over a decade now, country-wide. I've never seen a case where demand exceeded supply by “too” much and the growth was actually inverted as a result. But I have seen price growth eventually knock the wind out of demand and restore balance over time.

    If demand still exceeds supply, there's a very good chance we're not at the peak of prices. Prices will need to keep rising to subdue demand or supply will need to rise to match the demand. Both cases take time and during that time there should be capital growth until balance is restored.

    I don't think there is a concept of "too hot" or "overheated" if we're talking about supply and demand as the measure of heat.
     
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  2. Truly Exotic

    Truly Exotic Well-Known Member

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    During every hot/cold market there is always a boom/bust around the corner by the experts

    I've stopped taking notice now that I expected covid to dampen the market, not send it spiralling to new highs
     
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  3. Gwennie

    Gwennie Member

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    I'd be interested in your thoughts on whether it's worth buying in the current "hot market" particularly in Newcastle which seems particularly overheated at present. I've been trying to do the math to do comparisons of if you wait and stay renting or jump in.

    As a first homeowner buying a property for 1M in a "hot" market that means you are paying above market value (a 1M house is probably only worth 850-900).

    With mortgage repayments plus additional payments over say a 5-year term you could pay about 450k(90k a year) off the 800k mortgage. meaning with the interest you've got about 430k remaining owing to the bank at the end of the 5 years.
    With stamp duty and fees at each end of 50k, you've spent a total of 550k over that period of time - consisting of the 450k to the mortgage plus 50k stamp duty and fees at purchase and 50K sale fee's and don't forget your initial 200k deposit.

    You sell the property for the market value say 950k after 5 years as people migrated back to cities and the Newcastle coal industry starts closing down.

    Therefore the sale price(950) minus fees (50), minus what you owe the bank(430), minus your initial 200k deposit you walk away with 270k.

    If you stayed renting in Sydney at 800 a week you'll spend 208k paying someone else's mortgage over that time but if you put aside the additional 50K you have available a year as savings this means your position at the end of the 5 years is 260k (250 plus 10k interest at 1%).

    So, about the same net position.

    Am I missing something really obvious here, but why move to Newcastle to own an overpriced house, versus stay renting in Sydney and keep saving the money till the market gets a bit more reasonable?
     
  4. Sackie

    Sackie Well-Known Member Premium Member

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    +1 .

    Thanks for sharing.
     
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  5. craigc

    craigc Well-Known Member

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    Your whole calculations are based on assumption that prices will be approx 5% lower in 5 years time.
    What if this does not occur?

    Without knowing the Newcastle market, many have assumed markets will contract and are still waiting for it to happen as prices continue to rise further.
     
  6. datageek

    datageek Well-Known Member

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    Hi Gwennie,

    If what you say happens, then that would be a bad case for a home buyer and better to instead rent. But if prices went up not down, then it would be better to be an owner rather than a renter - all depending on by how much prices rose of course.

    BTW $750k should be enough to buy a house in most Newcastle suburbs right now. Given that demand outweighs supply and prices are rising, that might not be the case in say 2 years' time. The median for the entire significant urban area is currently $539k. 12 months ago it was $503k. It's unlikely a renter could have saved $36k in 12 months. Last year around this time the demand to supply ratio for the area was 57. Now it is at 62, so I'd expect faster growth over the next 12 months than over the last 12.

    No need to live in Newcastle, own there and rent in Sydney for example.
     
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  7. dl2016

    dl2016 New Member

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    Any reasons that last year's DSR score of 57 didn't tell us that Newcastle's market would be hot soon?
     
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  8. John_BridgeToBricks

    John_BridgeToBricks Buyer's Agent Business Member

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    I was listening to a real estate guy on the Patrick Bet David podcast today, asking if the market was in a bubble like 2008. His responses was that for there to be a "bubble", you need a there to be a surge in supply, and these excesses of supply leading to a bust.

    Right now we have supply shortages, suggesting that whatever we are in right now, even with the high prices, according to this assessment, we are no where near a bubble.
     
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  9. datageek

    datageek Well-Known Member

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    The DSR tells us what's hot now, where "hot" translates to "demand exceeds supply". The DSR doesn't predict what it will be in the future i.e. whether markets will be "hot" in the future. It predicts future growth by measuring the imbalance between supply and demand now.

    The DSR+ was 57 for the Newcastle - Maitland significant urban area 12 months ago. 50 is the theoretical balance point between supply and demand. So, some growth over that period makes sense, but the growth that happened was above forecast. Probably because during that time the DSR+ rose to 62 and along the way, the growth rate may have accelerated.
     
    craigc likes this.
  10. dl2016

    dl2016 New Member

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    Thanks Jeremy.
     

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