VIC Has The Ship Sailed

Discussion in 'Where to Buy' started by Joseph Attia, 15th Feb, 2017.

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  1. Joseph Attia

    Joseph Attia Member

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    Hi Guys

    I would love to hear your thoughts on the future opportunity in the Melbourne Market.

    Seeing that property in this country has a 7 year cycle, are we in a period where the market is slowing down and due to fall in the coming years? I have been looking at the South East Corridor in Melbourne and there are large areas of construction in places like Cranbourne, Officer and Pakenham.
    September had the largest build approvals in a long time and I suspect that these areas will reduced in value over the next few years due to oversupply and banks tightening lending criteria to investors not to mention a few rate rises on the horizon.

    Are we looking at a "price correction" in the next few years even with population growth?
     
  2. wylie

    wylie Moderator Staff Member

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    Welcome to the forum.

    I know nothing about Melbourne, but I wouldn't be making any assumptions like "this country has a 7 year cycle". That just isn't the case.
     
  3. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    I agree. Blanket statements like that are presumptuous and won't help you in your investing. A quick look at Perth instantly dismisses that theory.
     
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  4. Tony66

    Tony66 Well-Known Member

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  5. Cactus

    Cactus Well-Known Member

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    Pakenham is almost finished for land availability, aside from a few developments. The only land left in Pakenham is in very steep locations which won't get developed until the prices justify the costs.

    Officer is infill and prob only has a few years left.

    Cranbourne whilst huge is nearly finished too.

    So no I don't think it's going to get any cheaper.

    Farmers don't sell there land any cheaper. Developers own most of the parcels though with many transactions recent at record prices.
    Construction costs will not get cheaper.
    Statutory costs go up every new area that opens up for development.

    Yes there is more land opening up at Minta Farm and Clyde, but there is no shortage of migrants to sign it up...

    I can see potential for stagnation, even short term discounting, but significant price drops are less likely IMHO. Are you a little late to the party, yes... but I think the after party is in the west so might be best to look there if it's for an investment.
     
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  6. highlighter

    highlighter Well-Known Member

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    The 7 year cycle is not a thing, nor is any other timed cycle. What matters in markets is two major things 1. fundamentals and 2. investor sentiment.

    The two are closely related and inter-dependent, but broadly speaking fundamentals determine house prices as a consumer commodity (i.e. as house to live in with prices based on population growth, income growth, debt and serviceability, general economic conditions, rental demand, actual physical housing supply, construction rates and so on), and sentiment looks at how willing investors are to bet on the direction of fundamentals.

    You can imagine the two as being tethered - sometimes with a lot of slack, but always, always connected.

    Changes to fundamentals can strongly influence prices e.g. if population growth increases (as it did here during the early 2000s) this can place pressure on supply and in turn, pushes up prices - supply, demand, you know the drill. If physical supply exceeds demand (as is the case now in some areas) prices come down as buyers have more choice. Sentiment is not the same thing as fundamentals because it can rise and fall independent of these forces merely because some investors will see prices going up, and will assume a continuation. It can be very positive when markets are booming, and to a point it's possible for positive sentiment to persist (sometimes for years) even in the absence of good fundamentals.

    But the converse is also true.

    In regular boom/bust markets, sentiment usually tracks pretty closely to fundamentals, but in the rare case of a bubble or depression, a natural boom or bust is extended sentiment and fundamentals de-couple. In bubbles for example, prices rise faster than fundamentals due to manic investment, where many often very inexperienced would-be investors buy anything, quite indiscriminately, and push up prices merely on the expectation price rises will be indefinite (really, how many people do you find willing to admit to themselves prices might in fact fall? Even the bearish tend to at worst expect a "soft landing").

    All that positivity causes a feedback loop. In bubbles the key driver of sentiment essentially becomes sentiment itself - people buy because prices are rising, and prices rise because people are buying. Any real consideration of fundamentals is often, after a time, left far behind (or remains the province of more experienced investors). Buyers in this stage often look to quantity over quality, accumulating often poor assets like candy. Construction is stirred up like an ants nest, as many developers hope to cash in.

    When bubble markets turn, it is not because a certain time period has elapsed. It's also never because of an external "trigger" or "pin" like an economic shock or joblessness - this is a confusion of cause and effect (for example, the GFC and the demise of the Celtic Tiger were not the cause but rather the consequence of oversupply and rapidly faltering mortgage markets, which peaked in 2006 and 2007).

    Bubbles unravel when and if (and only if) sentiment turns. Often, this happens simply because the tether between fundamentals and sentiment is stretched too far. Investors find it difficult to borrow as high debts discourage bank lending. New home buyers struggle to either save or borrow enough to service a mortgage, or are unwilling to pay high prices. Oversupply causes current investors - primarily the large numbers of inexperienced and heavily leveraged bandwagon-jumpers - to doubt the profits they hoped to realise, and in an oversupplied market sales don't come easy, creating additional pressure.

    Bubbles aren't burst by a pin, but rather by a negative feedback - the opposite of the positive feedback that grew them. Often, you see a protracted peak, a few years of market malaise. And if enough of Australia's over-stretched recent investors and developers (the ones who've financed city fringe estates and unwanted apartments) struggle to sell then discounting will occur. If enough negatively-geared near-retirees start to doubt the foundations of their investment nest-eggs, many may try to cash out. If new buyers can't afford to or for whatever reason won't buy in, this could exacerbate discounting in a market already struggling with loose competition. If attitudes turn, you can get a perfect storm whipping these groups into a panic (not unlike the panic buying that puffed up the bubble).

    I'm not saying any of the above will happen, but it's silly to deny it can't, and it's likewise silly to imagine it can be predicted by any magic formula. Sentiment is a powerful but fickle thing, and it's important to remember bubble markets are driven both up and down by the inexperienced. Try not to fear that tide, but do acknowledge it could turn.

    If you're worried about the future of the market, that's not unwise, but no one has a crystal ball and predicting sentiment is difficult. The best advice is look to fundamentals, because ultimately, sentiment can only rise so far without them and the further apart our main variables of fundamentals and sentiment stretch, the more likely a violent snap-back becomes.

    A good investor understands that markets experience both booms and busts and good investors ought to prepare for them. This means always looking to fundamentals above all else. When you consider buying, ask yourself where is the momentum in this market going to come from? What will sustain it? What will make your asset appreciate in value?

    If you're looking at buying one of hundreds of identical CBD two-bedders, or you're looking at buying into a developing and oversupplied city backwater an hour from the city in a country where population growth and income growth is hovering at a two-decade low, well - you might want to question how stable these assets will be in a possible downturn (or, indeed, as rates rise). You might want to likewise question how stable developers and highly-leveraged buyers in these areas will be - because it is developers that often lead discounting in a bust. Will these assets act like an anchor to drag you down? Me - I personally wouldn't be touching these sorts of assets in a market with even the slightest whiff of oversupply, regardless of past capital growth, and definitely regardless of whether they appear "cheaper" (as they will also appear cheaper to the inexperienced panicky noobs).

    If you're looking at buying a good quality asset in a tightly held suburb (one where listings do not vastly outnumber recent sales) you are probably onto a winner. These sorts of family-oriented suburbs are perfect when you see the storms on the horizon (and tend to perform well even if you don't). Good suburbs dominated by owner-occupiers are less likely to see discounting as the middle class tends to hang on for dear life during a downturn, and these suburbs are also targeted by upgraders and new buyers as a market recovers. Good suburbs often have middle-income families, usually on dual incomes, and these groups are less likely to panic as they don't have to worry about capital gains. In a correction, they can act like a life bouy, and on the upturn they can bring you back up for air. Often, homes in good suburbs have outstanding renovation potential too with a lot of scope to add value.

    Now, I'm an Irish guy who likes to bang on about bubbles so take all this advice as you will - but I know from first hand experience there is a lot of opportunity to be had even in the worst of downturns IF you choose the right sorts of assets. Again, look to fundamentals. Sentiment can carry you pretty damn far but fundamentals represent reality - the actual tangible, measurable forces that underpin growth and will do so even if sentiment collapses. Someday reality may assert itself and this, for many parts of Australia, could certainly mean a correction. So buy carefully, with a rigorous assessment of fundamentals, fundamentals, fundamentals.

    I'd better go before I say fundamentals again.
     
    Last edited: 15th Feb, 2017
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  7. DaveM

    DaveM Well-Known Member

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    Fundamentalist :p
     
  8. strongy1986

    strongy1986 Well-Known Member

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    Joseph, whilst many have picked you apart because of your 7 year statement i would tend to agree with most other things you said.
    It will stop as it has in the past and history says that you will get a lower buy in price than you would of at the top of the boom.
    Are we at the top of the boom? No idea , but i wouldnt be buying now , particularly in outer east.
    Cactus, how has the land in Pakenham run out?
    Cardinia is all farm land. They will eventually sell and build more.rubbish house and land stuff.
    Plenty of land between cranbourne and patterson lakes too
    If that ever gets filled in chaos will rule
     
  9. Connor

    Connor Well-Known Member

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    I've heard these types of statments and predictions since 2009 when I began doing H&L builds in Melb. It's funny, despite many on this forum making excellent returns year after year with this strategy. Others seem to deny its happening. Makes no sense.

    The H&L market has strong fundamentals right now...developers cannot title land quick enough, many areas are sold out until 2018 and beyond, demand is high, Melbourne has the highest immigration in Oz, jobs growth is strong and the market in many of these growth areas is still affordable. Many estates are even selling land via ballot. Please tell me again what happens to a market when demand is high but not there's enough supply?

    Much of the land between Patterson Lakes and Cranboune is green wedge, not residential. It's not getting built on in the near future. But lets say it's rezoned and sold off to developers. It takes years for council approvals, development, infrustructure to occur. Also, factor in the rising costs to develop and bring the land to market. Do you really think it's going to be cheaper? Same applies for much of Cardinia. We are not going to wake up one day and find 10000 new blocks of land suddenly on the market.

    Yes the markets will hit the straps eventually, like all markets do. The east and south east are getting there, but there is still opportunity in Melb.
     
  10. strongy1986

    strongy1986 Well-Known Member

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    Connor im not saying you cant make money in these areas but i think 50% of the growth has already been missed in these outer areas.
    Your average house in pakenham might get to 450k but once this boom stops theres nothing stopping a developer from flogging new houses for 300-350k in the paddock down the road
    This has happened before in the last boom. Mysteriously the prices of house and land in the northern suburbs dropped from 400k to 300k after the heat went out of the market
     
    Last edited: 17th Feb, 2017
  11. strongy1986

    strongy1986 Well-Known Member

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    I should add that the fhog was scaled back which caused the new house and land to drop back - so maybe it wasnt that mysterious
    Low interest rates is this booms version of the fhog
     
  12. MTR

    MTR Well-Known Member

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    I don't know?
    However it would have been best to have jumped in earlier in the cycle?

    My only concern at the moment with property markets in general is how will the interest rate increases impact on ALL property markets in Australia. Experts are saying that 2017 will still see growth in Melb and Syd, albeit not double digit? Who knows.

    Their are risks of market sentiment changing if interest rates continue to rise, and banks tighten lending criteria which is what is happening today..... Your call??

    If I was buying in Melb I would stick to lower end below FHB cut off point, which is $600K to reduce risk

    I prefer to take my money off the table prior to markets correcting

    MTR:)
     
  13. Connor

    Connor Well-Known Member

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    Some areas have grown more than others.. You need to take an individualistic approach to the areas to identify where the opportunity is.

    Land developing costs and building cost are getting more expensive every year.. Estates are selling land into 2018 and still haven't got enough supply. Can't get it on the market quick enough. This situation doesn't lead to cheaper land/houses down in 2019/2020 or beyond.

    Low rates have impacted the whole market, not just one segment. A rise will also impact the entire market, not just this segment.
     
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