Im getting a bad feeling in my stomach

Very interesting. Thanks for spelling that out. Definitely puts things in perspective. Actually, I've always wondered on the holding costs of those kinds of properties. That gives me something to work with at a later point in time.
Cheers

 

Three possibilities are:
1) no correction and no crash
2) correction
3) crash

Which is more likely? Who knows?

I would say with confidence that number 1 won't happen. It seems fairly certain there will be a correction or crash at some point.

To claim that Sydney will crash because USA and Ireland crashed is illogical. Those crashes were caused by specific circumstances particular to those markets at the time. If we look at the causes of those crashes then we can understand the risks for the Sydney market. The Sydney market is at risk. There is no question. How much risk is really unknown.

Oversimplifying but fundamentally, the USA crash was caused by bad loans and the Irish crash by over building. Then we need to look at the extent of bad loans affecting Sydney and the extent of over building. Are the level of bad loans and over building enough to cause a serious crash? Unknown.

The other factor to consider is the differences between Sydney, USA and Ireland. What was the level of mortgaged vs non mortgaged properties in each before the crash? This is important because in an economic crisis an unmortgaged property is less likely to be subject to a fire sale. The other factor is owner occupier rate vs investor rate of ownership. Owner occupiers can go to ridiculous lengths to keep their home in an economic crisis. Of course this wasn't an option in the USA because many of the loans should never have been written. Does the same apply to Sydney?

2003 to 2013 Sydney really bothers me when looking for a bubble. I could accept an argument that prices will fall to a level between 2013 and 2016. I think that is entirely feasible. But to pre-2003 prices? Although possible I find it very unlikely. My opinion, not a prediction.

Sydney locals claim the boom that ended in 2003 was bigger than this boom. After 2003 there was a correction, not a crash. What is the difference between now and then?

 

Anyone else absolutely bored stiff with the endless 'what's the market going to do' posts? On pc probably not Seriously, try to buy well (price and location). Don't over extend your finances. Have an idea if you plan to sell or hold through the stages of the cycle (or boom, correction, bust, flatline). Have a portfolio that performs regardless of the market i.e. someone (preferably your tenant) is paying down debt.

Anyway, back to naval gazing and polishing of those crystal balls

 

It is important to me because I want to invest in Sydney before the next boom. I know the current boom isn't even over and I am planning the next one. I like to plan ahead!

A major housing crash would be perfect for me but I am trying to be realistic about what is more likely to happen. In my opinion a correction is likely but I will not be expecting a repeat of 2003 to 2013 when prices only rose 40% in 10 years. That would mean the next boom in Sydney will be 2028. I feel that I need to be ready to jump in well before then.

 

I'm gonna put everyone at ease. I predict with 100% confidence that we will see a +99% to -99% movement in the next 1 to 10 years in Sydney.

My crystal ball is always very fine tuned and more accurate than most, so you can trust me with whole heartily..

 

Sydney could flatline for a few years after this boom. Tell me you're not going to keep posting this stuff until 2028 Judging by your posts you've got alot more up your sleeve than just helplessly waiting for a distant maybe one day boom to make you money.

 

Hehe. Shh!

 

Hi Lacrim
Interesting observation, and there’s no doubt IR is an extremely influential component of market pricing. So if we stayed with your scenario of the 900k unit yielding $27k pa rent, if prevailing rates rose from 4% to 5% your investor yield expectation might then rise from 3% to 3.75%. Thus if rent stayed the same that unit could roughly drop in value from 900k to 720k (down 20%) if my math is okay. By no means a crash but a healthy correction for sure. Or would rents somehow rise to temper that a bit ? Cheers.

PS This calculation may now get stuck in my head so I shall call it Lacrim’s Rule of Thumb for Inner Sydney

 

Generally yes, if rents don't adjust quickly enough. Theoretically they will though ceteris paribus. We saw that in 2007-08? as interest rates grew fairly rapidly ie less people purchased, OO alike, and rents grew significantly.

 

Rents could also fall back, dependent if there is a glut, back to supply vs demand.

 

One interesting observation throughout this thread, constant comments from people saying that they want to know the timing and duration of any correction, because that is when they want to buy in.

It is that exact sentiment which would support a 'soft landing' argument. I get the feeling there are a significant pool of potential buyers out there sitting on the sidelines waiting for any signs of a pullback to allow them to get into the market. May put a bit of a floor under any big price falls...

 

I don't know if I would call Perth a soft landing but this is certainly happening in Perth. A lot of people have been waiting on the sidelines for prices to fall and are jumping in now. I really think this puts a floor on how low prices go. If properties are selling then the price does not have to go lower. From what I have seen, properties are selling.

 

Perth is only down a few percent, though isn't it? (4% in the last year according to the ABS) Perth's median in the last year fell from $495k to $477k. It's not properties selling though that will necessary arrest any price falls - there will always be demand. Fundamentals are a floor as much as they're a ceiling. What matters is whether there are enough sales for demand to exceed supply.

 

Sentiment is a funny thing - the people waiting for a downturn lose their nerve when it comes.

They tend to move to - "I'm waiting for the early signs of a recovery before I buy".

Markets tend to over shoot on the way up and on the way down because it is all about sentiment.

I also like it how some think they can accurately assess the broad market sentiment by attending a few open houses / auctions and talking to a couple of real estate agents.

 

The market peaked in 2007. Later, there was a mini "boom" that only affected a part of the market. That peaked in Dec 2015/Jan 2016. Since then some areas have fallen back around 30% from peak. That's why I said I would not call it a soft landing exactly.

One year doesn't tell much of a story at all. Perth 2007 to 2017 is up 11%. In real terms that is effectively a fall. Prices seem to have stabilised somewhat and I really do think it is because they are selling. There has been heavy discounting to get us to this point so sellers have demonstrated that if their property doesn't sell they will drop the price. People buying is what stops properties being discounted further. This is one of the factors that creates a floor.

 

Not in Perth. Plenty of buyers here with no signs of a recovery. I haven't seen stats on volume of sales but I can tell you I bought a property in the middle of last year and 3 of my friends have places under off now. I love buying in a down market.

 

On the contrary, a boom creates buyers who would not usually be buyers. A key indicator of this is a massive surge in local investor demand. You'll likley find a lot of the "investors" are uneducated and inexperienced in property investment but have experienced massive capital gains on their PPOR. Having had a taste of the potential of capital gains, they use their equity to double-down on their CG potential. Problem is, no one can actually afford a house and are buying on equity alone.

What has happened in Perth is that many people who were in this camp went all-in on multiple properties throughout the 2000's. With rents not covering costs and capital gains wiped out, they are now selling up to salvage what they can of their equity. Transaction numbers are a great demonstration of this, down from over 15,000/qtr at the start of 2013 to under 8,000 now.

A great example from someone i know - they bought a house in 2001 for $390k and by 2007 it was worth $900k. Used equity to buy 2 houses and 2 units along the way, making "smart decisions" such as "the next up and coming area" or "development block" or "worst house on the best street", all really just excuses to justify low yield. Since the 2007 peak they have been trying to offload all of their properties (2 left now) as they realised the lack of cohesion in their strategy meant costs were outweighing interest and capital gains. They know they rode a wave, and they consider themselves lucky to have escaped without any foreclosures.

 

4% according to the ABS but it varies in suburbs. My friend purchased a house in Forrestfield (15km East of the CBD) in 2015 and it's gone down 10% since he purchased it. A family friend bought a house last year and is now at risk of having it repossessed as he's struggling to find work as an electrician. The positive for Sydney is that from a State Government perspective the budget is in a surplus, which gives the Government some wriggle room to expand the economy if a slowdown was to occur.

 

If they can secure/source loans, this is in part why playing ground is changing. Tightening of finance and interest rate rises

Also corrections can last 7-10 years why on earth would you jump in straight up? Markets can continue to free fall

 

RBA keeps the interest rate unchanged.

RBA keeps rate unchanged