WA Perth or Melbourne??

Hi All,

Was hoping to get some advice on my current situation.
I'm looking to buy my first IP and have a budget of around $500k.
I currently live in Perth with around 80k in savings and 70k usable equity in my PPoR.

I was wondering whether buying in Perth or Melbourne would be the better option for a buy and hold strategy in today's market? - or the next 3 months or so.

I had considering buying in Melbourne and using any equity gained in the following 18 months to buy a second IP in Perth when the Perth market begins to recover. Id prefer to buy in Perth as i could potentially move into the place and rent out my PPoR however, i feel that Melbourne will out perform Perth over the next few years and that buying in Perth now may hinder my ability to buy additional IPs.

I would look to use a buyer's agent in either case and would also consider a H&L package if buying in Melbourne.

Any advice or comments would be greatly appreciated.

Cheers,

 

Shouldn't your knowledge of the Perth market trump what otherwise would be just pure speculation on a Melbourne purchase?

 

Any reason you think melbourne will out-perform?

Corelogic-moody's just released their calls showing Perth leading to 2020... it also pays a higher yield.

Out of interest where is your PPOR? Also why use a buyers agent in your own city?

 

I have to agree with @thatbum's sentiment.
I suspect Melbourne is near it's peak and might not go much higher and may infact go a bit backwards later so it's not a given that you will make more money in Melbourne than Perth.
But neither will Perth be a guarantee either but you could pick up a nice bargain here more easily if you know your suburbs and can keep an eye out for good buys.
Be careful about buying here and renting out your own PPOR as an IP as you might be making a messy situation with tax benefits.

 

Would you have a link to that mate?

It would be interesting to look into Core Logic's track record when it comes to growth predictions.

 

I might be terribly wrong, but I can't see a point in buying in a falling market (Perth). We don't know where the bottom is.

Melbourne might be close to the peak, but I wouldn't say so for cca 500k market. Recent stamp duty changes will fuel up that segment. I believe the challenge though is in finding something within that range as prices are rising weekly.

 

Short term, Melbourne will likely out perform Perth. How does this change if you look out to 2020 or 2025?

After Melbourne peaks, how long will the market be soft for? My property in Melbourne went up $300,000 in 9 years. Hardly impressive. The same property bought 2 years ago in the same area would probably be worth $200,000 more. The problem with buying in this market are you going to get the $300k in 9 years or $200k in 2 years?

 

My vote is for Perth too. The time for Melbourne was 2 or 3 years ago IMO.

 

Sydney, Melbourne house prices to plateau by 2020: CoreLogic

I released my forecast in January that wasn't too far different, mainly I under-predicted the Q1 gains in Syd and Melbourne. In short the biggest concern is that the level of employment and migration growth that has underpinned the current cycle is ending, and there will likely be an increase in unemployment at a time that interest rates are rising. Of all states, I would actually say WA is the most protected state against employment falls over the next 3 years because all of its sectors have bottomed, and all are only going up over the years to 2020 (mining, housing construction, government spending).

The cycle has also failed to materially increase rents. when I moved to Melb in 2014 I was renting a 2 bed house in West Melbourne for $575/wk. I could get the same thing today for $550. Yields have tanked, so people are buying purely on speculation (of more CG growth).

It may still have the image of being peachy to outsiders, but I am seeing cracks all over the place here. Auction turnouts are lower and margins above reserve are closing. Since the new year, lots of non-property-nerd friends are talking about holding off investing now, lots of talk that the market is too exposed to downside risk and rent returns are not worth it. One in particular is a couple on a joint income >$400k with a 6 figure bank account, so finance isn't the problem. They rent for a fraction of what it would cost to own, so the risk/reward just isn't there.

Peak of cycle investment locks you in to no growth for a good 5+ years. Expect no capital gains in that time, and likely either a fall in rents or an increase in interest rates. The real cost is that other market may be moving, but you're locked. All because you wanted a quick 5% on the tail of a boom.. 5% that won't even cover your buying/selling/holding costs. Is it really worth it?

I don't mean to be a doomsdayer because its really not that, but a lot of outsiders are looking to Melbourne right now and I think they are doing it without full appreciation for what its really like here. There is no such thing as a golden market.

 

I would have to say even when Perth yields suck - ie at the moment - our terrible yields are very similar to what is normal or good in Melbourne. Maybe this is a gross generalisation but this is what I have found.

 

I'm getting 4.95% on my Highgate townhouse and have seen a fair few houses for sale with 4%+ yields. The townhouse i last rented in Melbourne recently sold with a 3.8% yield (interestingly it actually went to auction and was passed in with only 2 bids, the second of which would have been a 4.1% gross). Worst I've seen so far is houses selling for $850k+ and renting for 350/week.

I hear good things about the CBD apartment yields in Melb, but much like Perth, no one wants to touch them yet.

i guess my point in reference to this post is just to be sure the associated costs and risk of an unfamiliar market are as well understood as possible and worth it

 

A very considered, well written post by @JL1. It's a great response to anybody who is fairly new to property investing and thinking of buying into Melbourne or Sydney right now for an investment. It's a reasonably common question that comes up quite a lot.

I can't predict the future but I know Sydney was flat between 2004-2009 - there was little or no growth. I think we'll head into that again fairly soon. Interest rates can't stay this low forever, and I think even half a percent will slow things right down. Momentum can't keep going. Scary thing is 45% of Sydney's market is made up of investors.

Long story short, I think its just not a good time to speculate that there will be further house price increases in Melbourne or Sydney. The boom has happened and soon it will be the peak then the markets will either decline (pull back) or stay flat (at best). If you already own an IP in these places, that's fine.

But it's a different matter to decide to invest now. It costs too much to reverse a property investment buying decision, so anybody looking to invest now (or anytime really) needs to take a lot of care.

 

I think there are some tempting properties in Perth at the moment. Funny it was only a few weeks ago some people on here were laughing/horrified when anyone mentioned investing in Perth but it makes as much sense as any of the other capitals. All of them could have a long period of low growth going forward.

Buy depending on the deal, your strategy, your resources and how much of your own money you want to throw at it each month to hold. Not which city.

 

No brainer...
Absolutely Melb will outperform Perth, why immigration and economy/service based industries.

Perth is a long way off, we have yet to replace mining, and I just don't see it at the moment. If upgrading primary residence then why not a good time for this in Perth.

Though land and house is not what I would do in Melb at the moment, too much risk of oversupply when market turns. If going Melb would be looking at areas/suburbs that will attract FHB, and infrastructure is good and also look at % of OO vs % investors, this will also reduce the risk.

 

on another point, with regards to L&H, land at the moment in new estates is a tough gig, everyone is jumping in there is not enough supply, that is good as prices will continue to rise. The problem is even if you secure land you will need to wait for titles to be issued prior to building and building takes perhaps 12 months++, building costs in Melb have gone up another issue. By the time you complete the build the market may have turned??

In a hot markets I would be very wary appointing a BA to source property, what do you think their clients are chasing? get in line and hope for the best?? time is of the essence in boom markets.

MTR

 

You are on the money with Perth.

 

Also Melb stamp duty I think highest in Australia

 

Imo Melbourne has a long way to go. Just my opinion but it will keep going until the cheapest houses are 450-500k

 

Not sure which auctions you are attending, but I'm still seeing 4-5+ bidders at most auctions we attend, with reserves in many cases smashed by as much as $50-$100K+ by buyers happy to pay the prices.

The Melbourne market is still very much buoyant. As to whether or not now or a year from now is the time to buy or whether you should have bought 2 years ago is irrelevant. You should be buying based on what is the best outcome that fits within your investment strategy.

If you can buy a property in Melbourne today that meets your need for a house on a block of land that you can later add value to - great, if that meets your strategy. If you can buy a property that has a yield of 4% in Melbourne today that fits within your investment strategy - that's great too (and yes, these still exist - I was talking to an agent last week about one).

There is not one size fits all when it comes to buying real estate. Irrespective of what anyone tells you, what ever you end up buying, where ever you end up buying, it MUST fit within your overall strategy and it must fit within your risk appetite. You also must have done your due diligence to ensure that no matter what the market does, you can handle it.

 

Wendy some good points there re. strategy and risk, but i have to very much disagree from personal experience that timing is irrelevant. I bought in Perth in 2014 when the market was very much buoyant. In 3 years I have now forked out nearly 10k in holding costs, on top of loosing ~$30k in value, and lost around $150k in missed opportunity by not buying in Melbourne. It was to be my PPOR but quite fast my situation changed and now i live in Melbourne, which also means I have added costs from an interstate investment (typically i would do much of the management myself). That is almost 10% of my adult working life where I have not only lost money, but missed opportunites elsewhere because of being locked to an iliquid asset. Also because I have not made equity, i cannot leverage another loan (which is the whole reason the OP wants to invest in Melbourne). Market timing is the reason I now analyse the market as strongly as i do.

The Melbourne market now is very different to the Melbourne market 2 years ago, and many who do not live in Melbourne only get the BS media articles about golden market Melbourne that everyone in the world wants a slice of. There are a whole stack of added risks now, be it rising rates, lower yields, higher incoming supply, higher mortgage default rates in some areas, higher household debt, slowing jobs growth, and peak investment spending.

On strategy - the OP has 80k savings, 70k equity, and the strategy is to buy a place in Melb then in 18 months have enough equity to leverage another IP in Perth. My point is that there is a considerable chance that will not work. Suppose in that budget you get a property ~500k, you would need at least 20% growth in the 18 months to have the equity to leverage the second loan. Personally I don't think its possible because of all the above-mentioned market factors, so the cracks in the market are very much applicable.