{Note from mods - posts in this thread split from here: Need urgent advice with a property purchase} There was a day not so long ago where investing in a 1 bedder was a much better prospect John. I am not sure how old you are but perhaps yourself and others may be interested in a part of a post I posted recently on another thread as in many ways it applies here as it refers to a 1 bedroom unit in Sydney. "Back in 1990 you could get 10% return on residential in Sydney. And while this is a commercial property thread, I will breifly explain for the benefit of others how the returns are also not what they once were for residential. And how hard it is today by comparison. Back in 1990 I know a guy who bought a unit in Sydney for 50k. A one bedder that rented for around $95 dollars a week. That is a 10% return on the purchase price prior to outgoings. So you could put down a 10% deposit and the rent would pay all outgoings, as well as the principal and interest 25 year loan. You could of put down only 5% deposit and again everything was still covered by the rent. But how would we go purchasing that same unit today ??? It was an average older one bedroom back then but would probably sell for 500k today. And rent for around $400 per week. So at first glance we can see the price has risen tenfold, from 50k in 1990 to 500k today. But the rent has only risen fourfold, from around $100 per week to $400 a week now. Today, even if I was to put down 50% deposit, the rent would not cover all outgoings and my P&I loan. Even with these record low interest rates, I would need to put down a 60% deposit for the property to be at a point that the rent would cover outgoings as well as the P&I loan. If rates were closer to 6 or so percent, I would need closer to 70% deposit before my rent was able to cover my outgoings and my P&I 25 year loan. Investing is certainly not what it used to be. And with wages no longer growing like they once did, rent can no longer grow like it once did as a result. That is another hurdle of today, where back in the day wages were growing quite rapidly as were rents as a result, this is no longer the case."
Great post Clyde. I agree that investing has changed. And I also agree that you typically play 1 bedders for yield and not for growth - for a bunch of reasons we can discuss in another thread. Here's where i disagree: looking at relative returns at different points in time is not useful. You can't compare yields in the 1990's to today unless you are going to compare interest rates as well. Interest rates provide the "hurdle" for assessing returns, and because the interest rate is much lower than in the past, you can achieve similar returns with a much lower yield. So you need to think about relative returns, not absolute returns, and you can't compare absolute yields to previous cycles. Moreover, wages have not gone up. But for a highly indebted society, a cut in interest rates is tantamount to an increase in wages. So over the last decade, wages haven't gone up considerably, but this role to the household has been fulfilled by lower interest rates. Now, I am not saying that any of this is healthy. Monetary policy is too loose and this has created all sorts of distortions, particularly to how markets would otherwise have distributed wealth. Monetary history is a bit of passion of mine. And the way I read things:- the greatest risk is of being under-invested, not over invested. I read in this forum well meaning and very successful/intelligent people discouraging people from purchasing property, particularly in Sydney, and it boggles my mind. It boggles my mind not because I have some crystal ball where I think property is about to go up or down but rather because most people's default position it not to buy property, and these same people typically regret not being more active. So while I don't encourage investing in just any deal, I am pretty encouraging of the act of investing itself.
@John_BridgeToBricks - some very good points, interest rates are no longer in the double digits, nor is inflation or wages growth, population growth has increased dramatically since the days of @Clyde's comments however demand for inner and middle ring suburbs has increased, the supply of housing (albeit in different densities) has also increased. The cost of construction has increased due to changing percieved 'needs' & building standards, no longer is a 3/1/1 house the median house for an entry level purchaser they're after 4/2/2 (or bigger) for a house on the fringe or a unit the size of a house (not the 1960's 2/1/1). Quality of construction has increased and is reflected in costs (BASIX compliance).
ip You hardly play 1 bedders for yield, once expenses are taken out there is not much left. The op example unit, even if you bought it outright, would show about a 2.3% return BEFORE tax. All this yield talk. You have not really listened here.. We have said not to buy this, and not to buy now. You have also not listened to the op's intensions of this purchase and have steered him into a near guaranteed loss. And going by many of your comments you seem to know this. Your comments about making mistakes. You mentioned nothing of falling prices or rents, nothing of oversupply, no mention that there is more units for sale there than in anytime over the last three years. As for your wages and interest rates, wages have gone nowhere and price rises have nullified any interest rate benefit for new purchasers. There is also little rate relief from here. Very little. And little if any wages growth either. As for your greater risk over invested, under invested comment, and better to be over invested. Not so when things are declining and are looking to do so for some time. And you calim it boggles your mind. That people are advising not to purchase in a downturn looking to get worse ? As for monetary history, as well as wages growth history, rental and price growth history, I have studied it EXTENSIVELY.
Would you say population growth increases prices. Or is it more to do with jobs and wages and resulting finances ? I would also say the quality of construction has decreased, as has the quality of workmanship and many materials. And that they just charge a lot more these days. More for less.
Population growth increases demand/competition for all resources. Property is just one of them. If you dump 20,000 extra people of working age into a city then there is going to be extra demand for housing & services but downward pressure on wages unless they are regulated (eg. award wages). The quality of workmanship may have decreased in some trades but the technology and quality of some materials and inclusions has increased. Glass is no longer a product of silica and heat (different glasses are used throughout a building eg viridian/low e glass, laminated and toughened varieties or combinations to suit the situation), light fittings are no longer simply incandescent/Compact fluoros/Halogens/Fluorescent tubes but LED throughout, materials sources are no longer coming from the Sydney basin (Clay pits/brick kilns at Ashbury, Artarmon, Croydon, Eastwood/Epping, Hills District etc have all closed), water efficient fixtures are more complex than a cast brass tap. The quality of workmanship has decreased depending upon the trade or the price that you're prepared to pay for them - this is also due to the changes in the training that we put into the trades, recognition of prior learning, the growth of registered training organisations, shift to private certification etc.
What if you have no jobs for those 20,000 . And if others already there were starting to lose their job with a slowing economy. The population would still be rising but prices could still fall, much like right now. We now, or did have recently, over 30,000 coming here every month, but prices, and rents for that matter were and are, still falling. And with very low rates I might add. I should also add that since the gfc, the US population has risen by over 30 million people. And despite the lowest rates ever, for over a decade now, most places are still cheaper than 2006. 30 million extra people , plus the lowest rates for over a decade now have not really worked in the US. Is population growth really a guarantee , or is it more to do with jobs and wages and resulting finances. I have found it to be the later, and that it is not how many people you have, but whether you have jobs for those people. And I agree with your comments on construction here.
