House prices could drop 20pc in crunch

Most people will do whatever it takes to try and hold on to a piece of real estate that they really don't want to sell. And if they are living in it then times it by 1000. This is simply not the case with the stock market.

There are many reasons/factors why real estate and the stock market to me are completely different beasts. The #1 factor though for me is the major differences in the 'psychology' behind both asset classes and how owners of these assets behave.

 

On this forum I'm an investor first and last time I checked this a community of investors though obviously they gravitate toward property asset class. And I'm not talking about home, I'm talking about property. As far as I can this is not a "homeownerschat.com.au", this is propertychat.com.au, is it not ?

BTW, it looks like ASX doesn't trade put options/LEAPs on Genworth Australia. It does trade options on QBE though. Will buy some puts on QBE with strike price of 9.0 expiring in Dec 2019.

 

Comparing property investment to the stockmarket is a flawed comparison. On the stockmarket, all shareholders are investors. Only investors can move the price of shares up and down.

With property, ~70% of owners are owner occupiers. Investors are a minority. Owner occupiers have the greatest influence on whether prices move up or down, so investors have to cop that. That doesn't happen on the stock market. So it is very relevant for a property investor to consider owner occupiers.

 

@Perthguy Not a stupid point you made at all mate. Personally I think its a very fundamental difference in structure you mention. And very important.


And it seems when one puts an argument forward as to why not all markets will behave the same, a few others automatically pump out the line " property can and will fall", suggesting we are saying otherwise.

It's honestly no wonder why relatively few people become FF from investing.

 

Technically speaking, that's not true.

1) company can buy own shares
2) employees can get shares as part of their salary package (often without immediate rights to sell)
3) the share price depends not only on external supply & demand (speculations), but the company revenue, profit and other performance indicators
4) the main share holders are often not investors, but owners (founders)

The main difference is that share price mostly depends on company plans and performance, rather that global trends in economy like for property investment.

If you buy a good property in a good location, there is no way it can grow 5-10 times on flat market, even if you renovate it. With shares, it is possible - the shares of specific company can grow fast even when the market is dropping. More controls, more predictable.

 

Still ...

Shares = apples
Property = oranges

They are both still fruit.,,, but they are very different, comparing them is like.,, what’s that old saying?

 

Not sure I agree with that.

What would be your answer to this question?

2340 on Twitter

In my opinion a minority group of buyers can be the primary driver of price if they start increasing their share of the volume.

Not that I disagree with your overall point that 'property investors need to consider owner occupiers'.

 

Your all wrong!! We should be selling our houses and shares and buying Bitcoin! #lambos #moon #lambosonthemoon

Honestly if you want a good laugh about wealth creation just join a few crypto currency forums or Facebook groups! There was literally a post with hundreds of likes about how Warren Buffet doesn’t know what his talking about and is a dinasour.

The next best one was when someone posted a poll saying if the share market and housing markets crash what will it mean for bitcoin. Majority said it would BOOM as people shifted money into it.....yes because the first thing I’m doing when markets bear is going to the safe haven and stability of crypto. Hahaha

 

I can't see any track record of Endeavor Equity Strategy getting market predictions right. However, a 20% fall for the Sydney and Melbourne markets is easily possible, that would only be a modest market correction in the context of prices doubling in the last 5 years and credit growth recently tanking. What's so controversial about this, am I missing something?

 

I see no problem comparing yield from acreage of orange grove or an apple grove. Just because property has utility value for a lay person doesn't mean investment analysis used on other asset classes becomes useless.

 

That's true but doesn't really address the point raised earlier:

I don't think it is correct to say that property is valued by earnings. The problem with an asset class like property is that an emotional owner occupier will pay over the market because they "fell in love with a property". This is not rational but it does distort the market.

The other side is transactional costs. OP is suggesting if the PE ratio drops then investors should dump their investment properties like a bad share. The problem is that transactional costs for buying and selling real estate is astronomically higher than with shares.

Further to that, just because the PE ratio drops for a property doesn't mean it is "bad". I have had mine drop on one I am holding. It is a two unit site and in future I will demolish and develop. I can't think of an alalagy in the share investing world.

As I was saying, comparing property investment with share investment is flawed.

 

Probably not but i think P/E is an intresting if not valid referance point to express how much you are willing to pay for a projected future value. Also current purchase price on a potential property investment forward next yr earnings will give you a future hurdle/breakeven growth point

lets say i have $x to invest, i can choose to buy an average Sydney property sitting on 38× P/E vs a broad market ETF at 17× P/E. On this comparison which assett holds the least risk/value for money?

I invest in both assett clases and treat earnings as the underpining fundamental value which sets a minimum holding risk on the assett. I look at future growth as the cherry on the top and as purely speculative. Both markets are driven on different fundamentals but future rate of growth is equally speculative and not guaranteed on either.

 

What is the typical PE ratio of a typical maisonette in Davo? If it is higher then a well located house in a better suburb, does that make the Davo property a "better" investment?

In your Sydney vs ETF example, I would pick the ETF too. But there is a lot more then that to picking a good property investment.

 

I think you may have that example the wrong way around. I would expect Davo to have a very low P/E compared to a comparable property in a blue chip suburb. Say for example Davo houso $200k at 7% yield = P/E of 14. North Adelaide workers cottage $750k at 4% yield = P/E of 25.

Because of the higher P/E of the Nth Adl cottage i would expect and require it to have a higher future return.

Definitely, P/E used in isolation is meaningless and is primarily a tool for gaging true comparison of cost. In equities P/E is primarily used to compare index to index or shares within the same sector. e.g Telstra to TPG, using it to compare BHP to a house in Sydney would be meaningless.

But using it to compare asset class to asset class as i said may have some validity, at the very least in the example of Sydney vs ASX, i think it's interesting.

 

Good point! I have not ever calculated P/E for a residential property.

I am better at calculating development potential. Planning Schemes, lot sizes, subdivision potential and land use permissibilites are my area of expertise. Unlike the OP, I understand these are not applicable to every investment property. So what works for me probably won't work for many other property investors.

 

If you do re-develop, you actually validating the common investment valuation approach: by re-developing you are increasing income/earnings the plot of land + structure generates and since valuations reflect not the current earning but the future expectations, it's entirely reasonable to have higher valuations in that case.

Another common case: gentrifying neighborhood. By perhaps doing smart reno that may make it more attractive to the new demographic with higher income and it is pretty valid to argue that future may have higher rental income than today and on that basis the specific property is undervalued.

But argument: well, this is Australia and in Australia everyone will pay premium for the house so house prices won't drop doesn't sound like an argument from rational investor. While property may make it easier to find the PPOR sucker to off load to, it seems like that approach is not going to work when it looks like regulators are stepping in to protect lay person from shooting themselves in the foot.

 

This is true. That said, I don't see many posts saying house prices won't drop.

What would I know though. I'm from Perth where house prices are back to 2005 levels in some areas. That's effectively 13 years of price gains lost.

Yes, house prices go up and house prices go down, sometimes for a long time!

 

Hi, just want to ask when they mention 10-20% drop does it mean let say if I buy now for $500k and try to sell it next year (or in the year of expected drop) I can only get $400k? is that the case? thank you.

 

Yes and no.
It really depends where you buy that $500k house. It seems to be a general consensus on PC that a low-end property will not drop to the same degree as a high-end property, and that there wont be any price drops at all in some locations.

10% can be an average figure, derived from say 1% in one part of the country to 20% in another part. This is why headlines and broad general statements can be quite deceptive.

If you are concerned and for us to address any concern you might have, we would need to know the specific details of the property/location.

 

They usually quote average figure,
so it could be more or it could be less, but whatever it is add a further loss of 8-10% (for Stampduty + holding cost + selling cost)