Timing of PPOR purchase in Melb’s outer SE – Mt Eliza / Frankston South - $930k > $1.25M in 18 mths!

Hi everyone,

For the last few years I’ve been saving for a PPOR in the Melbourne Outer East / South East.

We’re after something freestanding, with 3 bedrooms and backyard in a quiet, leafy street with good access to FWY’s and perhaps also trains. We were aiming for something around the $900 - $1.1M mark and have also considered a knockdown/rebuild.

Due to Melbourne’s ongoing boom, to get something like this have been pushed out further and further, and so we’re now looking at Mt Eliza / Frankston South / Langwarrin South / surrounds (as we like the big 700m2+ blocks, if we’re going to live this far out of the city).

These areas however, have experienced massive capital gains in the last 2-3 years. For example, one townhouse in Mornington that sold for $930k 18 months ago is now $1.25M. It would have been $700k not that long ago, either.

Now, I’ve learned the (very) hard way the importance of market timing, so naturally am cautious on buying in such a hot area after such a big boom. Louis Christopher’s report (SQM) talks about all Australian markets being deeply overvalued, and HTW’s monthly clocks also has both Sydney and Melbourne at peak or nearing peak.

I think the wisest thing for us to do at the moment is to rent in the area, learn it some more and also be a good position to buy 2-3 years down the track. The theory is the market will flat or (if rates increase, APRA tightens credit again or some other financial event) we able to buy after a small correction.

I understand anyone who took this strategy over the last 5+ years is much worse off, but from what I can see affordability has hit historical lows in Melbourne, with household debt through the roof. I just can’t see how a household with an income of $100-150k can afford the $600k houses of Narre Warren and so on – surely we’re at a limit here?

Thoughts?

 

I'm always of the opinion that the best timing to buy is yesterday.
If you buy a few years later, the probability of housing price movement is more likely to be: increase>stagnant>decrease.
I'm not saying price correction won't happen, it is just less likely than price increase.

 

Time in the Market
Not
Timing the Market

I purchased in Sydney back in 2003.

In the period in which I owned to 2008, there were similar properties going for 85% of the price i paid for.

Rental yield was rubbish too.

Fast foward to today, the place is now worth 300% more than what I paid for it.

People say, oh you're so lucky you got in early, but they don't realise the other side of the equation.

Obviously basic fundamentals need to be considered too. Sydney is not a one horse town when compared to the regional mining towns.

 

The ends of the Belgrave and Lilydale lines aren't of interest?

600k minus deposit and no stamp duty, with 150k income seems quite manageable to me..

 

600k on 150k income is hard?

 

Mt Eliza always had high income earners and even asx200 corporate ppl living Down there and this was already the case years and years ago.
It is a pocket that many ppl like as it is near the beach and ppl Who like outdoor activities is a really good spot. Also million dollar suburbs will eventually give the units growth due to affordablility entry points. This happens everywhere else in the premium suburbs of Melbourne

I know this area as I did my schooling in mt Eliza

 

I might be living under a rock but if a 600k home is an issue to buy on a 150k mortgage, there probably won't be a good time to enter the market for that individual, on the other side of the coin it might be the perfect time to enter the market as a forced saving plan as clearly money management isn't a strength of someone earning 150k finding it hard to buy a 600k house
Just my opinion as I do not know anyone's personal circumstances.

I've just learnt the best time to buy is when you can comfortably afford too, how I learnt this was from my dad, a conservative investor (over conservative lol)
Me: Dad why didn't you buy that house when it was auction in the 90's?
Dad: Cause it was too much
Me: why don't you buy that house now?
Dad: Because it's way overpriced

Lesson I took from that little 5 min chat I had with the old boy, if I can afford to buy then I will because in 20 years I'll be still saying it's too much

 

Consider Seaford, Carrum or Chelsea Heights. Carrum Downs is cheaper but loses points for amenity and lifestyle.

The likes of Mornington and Mt Eliza have elegant streets but are full of older people who are dying off. Who will buy them? Such areas are further from strong high-paying labour markets than areas further in. This may put a lid on long-term growth compared to less prestigious but more conveniently located areas. There will be a portion of the market buying for lifestyle (maybe selling up in Brighton to move down the coast and investing the remainder to life on) but not sure about the numbers. Mornington & Mt Eliza have almost no recent migrants so aren't necessarily having their prices pushed up by recent arrivals (like Werribee at the moment).

 

Wasn't going to say anything because that price bracket is too scary for me. But the thing is, you're buying a ppor, not an ip. Of course, it wouldn't hurt if everything stacked up and you made a motza out of your ppor as well.
So, as I said, I wasn't going to say anything but I reckon some of the Melbounian responses above are surprisingly weird. I don't know Melbourne that well. And I am biased because I have a property in Frankston. I don't want to spruik - not at all. But, I honestly don't think that place will be going backwards again, especially not Frankston South. In fact, I want to sell but I can't bring myself to do it because I know it's only going to get better and better.
Like you, there are young people priced out of the areas they initially wanted. They can't move into the classy suburbs and so they're bringing their classy selves to Frankston. OK, so the oldies are dying off in surrounding posh suburbs - hello... the new posh will be younger.
I heard today that Louis Christpher reckons the Sydney market will take off again at the end of 2018! (2nd hand news - will have to check this for myself) In any case, Melbourne has been doing its own thing for a while now. There are all sorts of theories about crashes, plateaux, stagnancies and a never-ending boom. Who knows what will happen?
Although I personally would prefer to buy at the bottom of a cycle, it's not always possible. Plus, if you buy now, you get to live in it and make the changes you want sooner.
Like @neK , I bought a house at the top of the cycle and held for 5 years with no growth and a 4.5% yield. That's the Frankston house that I now can't bring myself to sell. I hope I never make that mistake again. But living in it would negate a lot of the drawbacks.
I have noticed that there are more houses on the market - well, it is spring. But prices do not seem to be going down. REAs have said they think there will be a lull coming but plenty of experts say otherwise.
Whatever you decide, I hope you will then let go and be happy with your decision.

 

My mistake - the average yearly household income in the City of Casey is $80k, with 3.1 people per household (young families - Mum + Dad + 1-2 kids). ABS

I think with increasing cost of living (food, power bills, etc) it would be hard for them to buy a $600k property. On that income I can't imagine them saving much each year.

 

Thank you Y-man, we have considered Belgrave and surrounds. We really like that area. We have family further down the Pensinula so was hoping to be closer to them though.

Thank you WattleIdo. I know how you feel, I am also in this boat - I've bought 3 properties at the top of the cycle now:

1. A 'Wakelins' apartment in prime inner Melbourne, only to sell 9-10 years later. It grew about 3% - 3.5% pa, but after the negative cashflow, it just went sideways. Almost 10 years of opportunity lost.

2 &3. Another 2x in Gladstone, bought at the peak, I've held for 6 years of painful decline. Now both worth $200k less, renting for 1/3rd, one currently 2 months empty. This has been extremely hard on me to be honest, I'm still waiting for the market to find a floor. In short, we sold our PPOR and have been renting, weight gain, other things.


I hope you can see why I'm so hesitant with my PPOR now. If I this were to happen again on my biggest purchase, buying something in Mt Eliza to be worth the same or less 3, 5 or 7 years later, I think it would it be very hard.

 

Yep, agree with you there, 80k to 150k is a big difference, not impossible but still very difficult. Your right I couldn't imagine much saving either!

 

I'd be just as tempted to rent there. They say you should rent for a couple of years in an area anyway.

 

The bearish part of me thinks that timing is important.

In December 2007, the median house price in Dublin was €400K ($600K), whereas Sydney was a touch lower at around $540K.

Dublin then dropped to around €200K ($300K), before recovering to €320K ($480K) now. So after a decade, you'd be down about $120K. Sydney more than doubled in the same period.

Two things here:

1. Inflation will eventually bail out unlucky buyers in Dublin, but it might take fifteen or more years. (Prices seem to be rising quickly there, prompting concerns about a new bubble.)
2. You don't know in advance if you're in a Sydney or a Dublin. Some markets crashed, others dipped and then recovered strongly.

Conversely, timing is difficult, and not just because of the effects of inflation.

If you're renting, you're going to have pay that whilst you sit out the market. Over the longer term that'll burn through the eventual savings in the event of a crash.

Then there's the fact that a repayment mortgage unsurprisingly gets repaid.

I'd need to crunch numbers better, but my guess is that you're looking at prices needing to fall by 6% or 7% per year you sit out the market in order to make "shorting" it worthwhile.

Whether or not buying a PPOR makes sense at present is up to you, but I can't see Melbourne prices continuing to ramp up whilst Sydney is declining. My inclination would be to hold off for six months to see if things cool, as I'm not seeing a lot of value in the market here.

 

He's in a Melbourne -Australia's dark horse.

 

Wow, thanks for sharing. That is very interesting comparison between the two cities.

In Louis Christoper's latest SQM Boom and Bust report, he says that Melbourne and Sydney (and most of Australia) are very overvalued, and are out of kilter with each of the 4-5 ways he uses to measure value (house prices to income, GDP and a few other things), and then goes on to say prices have reached these values due to the 200k+ pa level of immigration that's been happening.

I wonder - if these new migrants are here to stay (presumably they are) and this rate continues (maybe/maybe not), you'd think that would maintain these prices.

A Melbourne based buyers agency Performance Property Advisory did a 'where not to buy' presentation and specifically called out Mt Eliza as an example. There view is Melbourne will likely go through a similar period of stagnation that Sydney in the 5-6 years prior to it's most recent boom.

It's great to hear more feedback, I'm leaning towards renting down there for a year.

 

I never thought of it this way. Can you help me understand how you got to (roughly) 6-7% @Graeme?

As an example, Mt Eliza is 2.9% yield (houses). Wouldn't this mean if prices dropped 3% in a year you'd be about break even? (or even less after including other ownership costs like rates/maint/insurance)?

 

No, imagine a $100k house renting at $3k pa (made up numbers) - yield 3%.

If this house price dropped 3% ie. $97k, yield would increase by 3%

New yield would be 3/97 = 3.09% pa