What if the market tanks??

Discussion in 'Property Market Economics' started by MTR, 2nd Aug, 2015.

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  1. sash

    sash Well-Known Member

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    Never say...never...we'll see...what do think will happen to people if rates go to 7% in Sydney when they borrowed at 4.5%....this is question of when.....if the job situation is also dire when this happens...then it will get interesting.

    The outflow from Sydney is now picking up pace...mostly to Melbourne and Brisbane.
     
  2. DCTY

    DCTY Member

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    when time comes, usually couple of things will happen: interest rate will drop, gov't start to print more money (so called QE) and if that not going to put pressue on inflation, people usually will hold off their purchasing mainly due to the lack of confidence of their job security and future income stream. most of people have ok LVR (say 60%) will be riding out as there is no such thing as "margin call" in the property mkt, as long as u can still service the loan. vacancy rate will be dropped like stone and good chance to increase the yield on the IPs. that provided more chance for investors riding our the storms.

    we had 1 baild out card (China) and 1 safety net (low public debt% vs. nationwide GDP) during GFC. most people would think that safety net probabily won't be there if the next storm is coming from China, but there are still some cards gov't can play if it eventuate.

    bear in mind, Australia have one of the safest banking system in the world, until it's become a full blown credit crisis (which is much less likely to happen here), it's just part of the market cycle where eventually it will correct itself when supplies dries out (as most of the developers will pretty much wait when market tanks).

    i'll do some reval and try to pull some equity out and have them sit in the offset account to create more buffer, then wait. plus it proven to be some good buying oppty in the buyer's market where some of the good deals can be made. the other thing i am considering atm is to furhter diversity the portfolio into oversea market ;)... but that itself needs a lot of research and i am not there yet.
     
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  3. Perthguy

    Perthguy Well-Known Member

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    I agree. I don't find the question offensive at all. Even though I don't agree the market will 'tank', we are in Perth where the market is undergoing a very significant correction. I don't see it as anything to get upset about. It's more a question of finding opportunities.

    I am keeping my eye on the market looking for opportunities as prices return to more realistic levels. I'm still looking :) IMO, prices still aren't where they should be (still too high). Maybe in 6 to 12 months. In the meantime I will be attending home opens on weekends because that is the best way to gauge market sentiment. I have been to home opens with more than a hundred people (when the market was hot) and to home opens with no people (after the market died). I find the contrast very interesting.

    In terms of strategy, I am holding Perth with a view to develop. I cashed out of Melbourne late last year because I was holding a development site with no short to medium plans to develop. Not fesible for me.
     
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  4. Sackie

    Sackie Well-Known Member

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    @Perthguy I am also looking to buy into Perth for some development opportunities. How long more do you think until you'll see really great deals to be bought? Do the numbers currently stack up or is it still a tight margin ?

    Thanks
     
  5. Perthguy

    Perthguy Well-Known Member

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    Numbers are not stacking up for me yet. I would guess 6 to 12 months before we will see great deals but I am keeping a close watch on the market in case sentiment changes. That said, there are properties being listed all the time and there could be some good deals around. They are just a lot harder to find when the market is dropping.
     
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  6. Sackie

    Sackie Well-Known Member

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    Thanks @Perthguy . Can i ask what kind of deals your looking at?

    Cheers.
     
  7. Perthguy

    Perthguy Well-Known Member

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    I am looking for a block to build a main residence (PPoR). This had potential:
    Sold Price for 70A Arlunya Avenue Belmont WA 6104

    My investment partner is looking for a place to renovate and flip. Something like this perhaps:
    Sold Price for 224 St Kilda Road Kewdale WA 6105

    Together we are looking for project for a renovate and build. So the front house could be renovated and sold leaving a block at the back to build on to retain. Something like this, which seems drastically overpriced but at the right price would be a good project for us:
    81 Hardey Road Belmont WA 6104 - House for Sale #120597365 - realestate.com.au

    I even found my investment partner an "after" for his duplex half. Totally unrealistic but something to aspire to! :)

    173a Lawrence Street Bedford WA 6052 - House for Sale #121040606 - realestate.com.au
     
  8. Sackie

    Sackie Well-Known Member

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    @Perthguy Thanks for the feedback mate. For the 81 Hardey Road site, what price do you think it would need to be bought at to make sense profitwise?

     
  9. Perthguy

    Perthguy Well-Known Member

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    No idea. It's R40, so it's really a demo and develop site. Apartments are out because they are oversupplied in the locality, so we are building townhouses. 3x2 or 4x2. I don't know. I am assuming a build cost of around $280k with a demo/site works/servicing budget of $80k.

    End values are abysmal. There is a near new 3x2 in the vicinity on the market for $459,000. Assuming they clear $450,000 that is going the make the numbers on this property very tight.

    The block size is 802m2. R40 has a min lot size of 180 sqm and average of 220 sqm. So this is nominally a 3 unit site. As an example, we will run the numbers at a purchase price of $650k

    Purchase Price $650,000
    Conveyancing $750
    Stamp duty $24,890
    Mortgage registration fee $164
    Transfer fee $294
    Bank settlement fee $220
    Total costs $676,318
    Prepare and service block $80,000
    Build cost (3x$280k) $840,000
    Surveyor fees $1,000
    Strata title fees $916
    Total investment $1,598,234
    Sales (3*450,000) $1,350,000
    Selling costs $40,500
    Loss $288,734

    Even if you could get the build cost down to $250k and the sale price up to $500k (premium for new?), you are still looking at a loss. I could be calculating this wrong. I'm @Westminster will be able to jump in here and point out what I've done wrong :)

    In the current market, based on current end values (as far as I can see), I would be looking at a purchse price of $500k to $550k.
     
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  10. Sackie

    Sackie Well-Known Member

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    @Perthguy thanks for the numbers mate. I have no idea about Perh numbers, but assuming your within the ballpark, even if you bought it at 500k and not 650k, based on those end sale figures wouldn't the profit still be a negative $138,734? Probably also some other soft costs as well as contingency... so i see what you mean now about not stacking up, at least based on those figures mate.

    Cheers
     
  11. MTR

    MTR Well-Known Member

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    there is actually no holding costs in these figures
    End values low? what area?

    have a look at my Willagee numbers, I actually think if you can buy the block at right price it will work today.

    I do believe after further research villas @ 18 sq will fetch high 500s - 620k.

    Values are actually holding up, I think because sandwiched between blue chip and demand for this product by people downsizing. I know 2 investors starting to build as rezoning ratified in 2 weeks. I am actually going to meet with a draftee shortly on this

    I guess important to find the sweet spot in this market, the higher the end values the smaller pool of people to buy just my opinion

    MTR
     
    Last edited: 14th Jan, 2016
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  12. Perthguy

    Perthguy Well-Known Member

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    Once the feaso goes into the red I don't bother with holding costs. What's the point?

    In the area where the property is located that we are running the feaso on... Belmont.

    We are running feaso on 81 Hardey Road, Belmont. This is for sale a few doors down for $459,000. Granted it is not new, but buyers will compare what we develop on this site with what is on the market in the area. Low end values.

    reiwa.com - Lot 12, 12/53 Hardey Road, Belmont

    I agree. We are trying to figure out the right price. This might be a case of wrong price, wrong property, wrong area. The numbers don't seem to stack up to me. Belmont is not Willagee.

    Not in Belmont. Brand new 3x2 townhouses on the market nearby for $499,000 *. These have upgrades too, like stone benchtops etc.

    reiwa.com - 30-32 Raleigh Street, Belmont

    * although I don't know if they are 18 sq.

    Edit: a 4x2 townhouse in the area sold for $545,000 in the area about 6 months ago. Even at that price, we are still looking at a loss unless my build cost is way too high.

    reiwa.com - 7/22 Lapage Street, Belmont
     
    Last edited: 14th Jan, 2016
  13. Perthguy

    Perthguy Well-Known Member

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    I believe it would still make a loss, which is why I'm not touching anything in the area right now. Possibly in other areas the entry costs are not so high or end values are holding up better. @MTR mentioned Willagee where end values have help up and not collapsed like in Belmont.
     
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  14. MTR

    MTR Well-Known Member

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    I would probably give Belmont a miss clearly this area won't work for this product and if you go apartments there is an oversupply.
     
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  15. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    That's pretty much what he was showing. Leo wanted to know if the block would work and @Perthguy was showing it wouldn't and to work backwards to when it would work would require a massive discount.
     
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  16. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    BTW @Perthguy the only way it *might* work would be something like 6 x two bedroom two storey apartments but although the location is good for it (being close to the city) I feel there is still too much competition from apartments and low cost villas to make it work.
     
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  17. MTR

    MTR Well-Known Member

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    Numbers may work but this would be suicide agree with you too much competition, oversupply means end values will fall
     
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  18. Perthguy

    Perthguy Well-Known Member

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    I drive hardey rd regularly and there is a lot of construction right now. Way too many apartments but lots of townhouses too. The key is to know the area and over development in a falling market is a real red flag.
     
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  19. Bayview

    Bayview Well-Known Member

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    Get ready to buy in a year or so when the bottom has finished falling out of it?
     
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  20. Perthguy

    Perthguy Well-Known Member

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    I'm ready now. :)

    I will just keep plugging away, running the numbers and monitoring market sentiment. At some point a deal will stack up and if I like the numbers, I will buy.
     
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