The only way Isn't up

Steve McKnight is about the only property guru I pay attention to, he is always way ahead of the crowd and understands how markets work and seems to get it right. He has the track record to prove it.

Here is the lesson......

You want to be ‘invested’ during the growth times, and ‘divested’ soon after the peak until the next growth period begins again. This is because during the flat and down times the risks of owning property exceed the returns.

Australia is ‘due’ for a property price correction. The trigger will be rising interest rates.​

Here is an extract

All booms must eventually end (usually when sense overrides sentiment), and when they do, markets that have overshot on the upside tend to overshoot on the downside; the bigger the boom, the bigger the bust.

So what does the data say about current market conditions?

Affordability Conundrum
Figure 1: Price to household income by city


Source: J.P. Morgan, ABS, CoreLogic

Figure 1 measures property prices as a ratio to household income over a 35-year period in Melbourne, Perth, Sydney and Brisbane. It reveals:

1. As far as risk of over-valuation is concerned, the present order of high to low risk (at least by the portion of income needed to afford a home) is as follows: Sydney, then Melbourne, then Brisbane, and lastly Perth.

After market ‘peaks’, there tends to be a multi-year ‘catch up’ when property prices stagnate while incomes rise, before another ‘growth’ cycle be The lesson here is that you want to be ‘invested’ during the growth times, and ‘divested’ soon after the peak until the next growth period begins again. This is because during the flat and down times the risks of owning property exceed the returns.

Investing Sense and Sensibility
Figure 2: Price to market rents by city

Source: J.P. Morgan, ABS, CoreLogic

Figure 2 speaks to the ‘sense’ of values as they pertain to income returns, and reveals a level of speculative lunacy, particularly in Sydney and Melbourne, which is worrying.

Back in the early 1980s, investors bought real estate primarily for positive cashflow rental returns first, with any capital growth a bonus. This was a valid strategy because the debt underpinning the property was self-liquidating; meaning the loan could be serviced and repaid from the net rent.

Fast forward today and net rental returns are negligible or negative. Now property is purchased for growth with the underpinning debt usually not repaid at all. Instead interest-only loans are the debt instrument of choice, and loans are ‘traded up’ when the property is sold or refinanced into the next more expensive deal. Today, debt is something you get in to and never out of.

Purchasing an asset with the strategy of making a certain (income) loss today in the hope of an (uncertain) growth profit tomorrow is inherently high- risk.



..... protect your capital

 

What concerns me is the high amount of people with no financial experience buying multiple properties. These are the people who just shut their eyes and buy something whether they can afford the risk or not because they cannot imagine a downturn.

It's a major red flag at that point and it's not the crowd I want to be a part of. The masses always get screwed.

 

If 'Australia' is NSW and VIC, then yes. 'Australia' is due for a property price correct.

I don't see Perth as 'due' for a property price 'correction' though, do you?

That is factually incorrect. APRA has set a limit of 30% of loans being Interest Only, which means the majority of loans are Principal and Interest.

It would not be difficult to correct this claim and present factual information. The question that you need to ask is what would motivate someone to present information that is close to being correct but is not actually factual. Sales pitch?

 

I do get a sense that there will be a correction. Especially in Sydney and Melbourne. I think Hobart is also on the nose as locals are outcompeted by mainlanders. It really depends. Rising interest rates will dampen growth. But unless unemployement changes it is unlikely that there will be a correction per se. Just a flat line.

 

I think SM was referring to Syd and Melb as they have had significant growth. Perth has already had a correction, perhaps at bottom? not sure.

I believe if.... interest rates rises, all markets will be effected regardless.

I still have loans on interest only?? Of course APRA has come into play but these loans still exist.

But SMc is providing the tools/education

Either way, SMc business benefits regardless of whether its a boom or bust cycle. In fact probably better outcome in boom cycle.

 

Everyone is ignoring interest rates rises which seems to be on the cards this year?? We have enjoyed low interest rate environment for years, this is about to change

I started a thread on the impact of interest rate rises, this will hurt

Increase in Interest Rates - Expected Impact

 

Shall we look at this.


Syd - market softening

Melb - clearance rates dropping off and markets started softening end of Dec 17

Bris - fragmented market, over supply units, hit/miss, if interest rates rise we wont see a boom

Perth - already corrected, price sensitive, oversupply

Adel - yet to see a boom, if interest rates rise it may go backwards?

Darwin - already corrected, oversupply

Tassie - booming???? but been going strong for 2 years?? interest rate rises will impact on this market/yields

 

The people who (more often than not) have a good chance (not always though) to get screwed are the people who have zero education on real estate investment and make very poor decisions. If you want to reduce your chance of 'getting screwed', educate yourself. Stop the doom and gloom statements and actually educate yourself with some serious study. I don't know if your serious or not though based on quite a few comments you've made.

 

Something of particular concern to me is the ironically hysterical notion that Australia's market cannot correct, that this country is somehow immune, that it's unlikely, that it is "doomerism" or that it is (sigh) "hysterical" to suggest a market (at least in Sydney's case) that has seen years of high single-digit and double-digit growth might ever experience a retrace. I find it gobsmacking that people can see a market rise 20%, and yet will dismiss the idea Australia's market could correct by that order of magnitude.

Sadly, markets have a multi-decades-long pattern of correction, sometimes relatively close, sometimes further apart. We have gone a very, very unusually time in this country without a recession or property market correction of greater than a few percent (on a macro scale). Part of being a good investor is knowing when a cycle is turning. If you're denying a correction could happen, could be imminent, or could be significant you are no better than the inexperienced investor who buys high on a whim without forethought.

Markets correct, especially where valuations are out of sync with incomes, population growth or rental yields. It is that simple. And if you're reading this, getting all precious and thinking "there's no way Sydney/Australia/any part of this country" could correct 20% or more in the near future, ask yourself why you imagine that is? On what basis? Because a crash hasn't yet happened? (Given the often one to two decade long run of property market, "I've been hearing about this crash for years" is actually an argument strongly in favour of a near-term crash). Because it would hurt your investments? Because you don't want it to happen?

"Stop the doom and gloom" as an attitude, risks a complete want of adaptability in a pinch. Isn't it much better to acknowledge a correction is a definite possibility, and to form a solid plan for what you'll do if and when it happens? A good investor should always have that plan in place, and should never tell themselves the idea of a market collapse is not highly possible. That would be burying your head in the sand.

 

I think Perth has already had its correction. NSW and Victoria I personally think are at risk of a correction.

 

I agree with a lot of your post but not this part. I don't believe Australia's overall market (speaking broadly) is highly possible to collapse. Sure, anything is possible, but I doubt its highly possible mate. If I thought it was highly possible I would exiting most of my positions asap.

Just my take.

 

It all will become much clearer once the Fed rises the rates. Just wait. The problem is when it will happen? Wait too long and you miss opportunities. Jump before the rise and you are in for a haircut.

 

Its already happening

 

The longer you wait more risk, dependent on individual debt

 

That’s true. I would personally try to keep cash balances high at this stage. Till at least it is much clearer what the future holds.

 

Market cycles
Up trend, people jump in out of fear of missing out, purchase at top prices and carry as much debt as banks will give them.

Down trend - can’t service debt and sell at any price due to fear of losing

It happens every time and repeats over and over and over again

Real estate agents - make money in every cycle.

 

Youse wrong MTR...only way is up in Sydney...everywhere else it is down....

Don't tell anyone....it might spoil their meal....time has come for me to sloooowwwllllllyyy.....divest....starting with 2 in NSW .....none in Sydney though.....

Next cab off the rank is Melbourne potentially 2-3 there....by 2020.........who would have thought huh?

 

I agree. My point is that Melbourne and Sydney are not "The Australian Property Market" as claimed by SM. I found the story to be an inaccurate sales pitch and did not buy it. If he has no claimed the "Australian" property market is at risk of correction then I would generally agree with his sentiments regarding a market correction. It's sloppy marketing to Sydney and Melbourne investors.

 

OK, but that's a business

 

Dont get burnt, are shares close to peak? I dont buy that cost averaging strategy