Would it be WISE to purchase my first IP in Melbourne right now??

Maybe try frankston. No doubt upper end will stall but that sub 600K market will fly (1st July) this was the same as the FHB booster bonus in the late 2000s.

 

I have to disagree on the "time in" the market for OP's context. As it is a low deposit and will require LMI, there is no question that in Melbourne this will mean a negatively geared investment and will be costing money. History shows us that consumer behaviour over-exerts in bull markets and swings hard when the bears take over, and this results in 7-10 years' stationary prices. So for a mature investor with a broad portfolio and decent LVR, revenues will tide over costs. a diversified portfolio will also help to alleviate problems of certain sub-markets performing worse than others, and if a tenant stops paying rent, it is alleviated by tenants that do pay.

The other downside for a first-time, high LVR investor is that it is very hard to sell a property as you can't afford a price hit. this could mean many years stuck with an illiquid asset that costs you money, and you are not in a position to take advantage of opportunities that come over the next few years.

over the past 20 years, rates have fallen from 18% to 4%, dual income homes have dramatically increased, investor activity has spiked and in-fill targets have sent land values soaring. Inflation has been over 7%/year, and is now struggling to maintain 2%. Wage growth is even lower and the government has been spending way over what it can afford to. Despite this, we are still not seeing full employment and there aren't many reassuring signs that things will get better there. These are all factors that will make capital gains harder in the coming years vs what most people have witnessed in their time in property; especially FHB's who have only ever seen 5 years of charging prices fueled by ever falling rates, recession-like government spending and a slow to respond building sector that was not prepared for the increased residency permits.

I am in the "wait and see" camp, not just because I am a bear on the Australian economy over the next few years, but also because selection is so low and competition so high that total crap is being sold with a premium property markup. Even if property makes another 10% on today's prices, you can always buy at 10% below market value in a down-turn.

 

Timing the market is absolutely critical, how will time in the market help if you were an investor who kept purchasing at peak?? I know bad luck, but it does happen to many investors who get over excited and lose their head.

Holding an investment property that is going nowhere is a waste of money and not very smart.
Investor still needs to pay the bank interest, missing out on other opportunities to grow capital, property is losing value and you are technically stuck if you can no longer access equity or worse can not sell at the same price of purchase.

 

the stimulus may help the sub $600k market, but we're at a very different point in the cycle for it to "fly"..

I'd be going option "B" for now

 

let's see in 2-3 weeks when it hits July - could be wrong (but should no diff to the FHB boost in the mid 2000s). Also not necessarily 600K will move it could be lower end Werribee 300K to move. I'm not buying in the H&L did that 3 years ago.

 

If you have some properties under your belt, then "wait and see" has more merit. If properties continue to increase, so do yours. If properties stall or drop, you have opportunities to pick up some cheaper ones. Advantages/disadvantages of each possibility balance themselves out for you to migrate risk.
If you have no properties, then "wait and see" can be a big risk if prices continue to rise for 1-2 years before stalling and not actually dropping. Eventually it starts rising, but due to no drop, you never got in. Also, what do you do for "a few years" ? Do you just put it in the bank? Don't forget you have no property to put it into an offset. Do you invest in shares? They are volatile and "stalling" property prices tend to just not move and less often drop significantly. "stalling" shares you lose half your money and it takes a decade to recover and if you withdraw, you take the loss, and if you don't then you can not take it out to invest in property. All options are pretty bad.

"wait and see" is a pretty good option for someone with a few properties. for someone who has not yet gotten in, it has a risk that you do not have to worry about and may not be considering.

Although I do agree that if someone is purchasing, they better be able to service it knowing that there is a good chance that a 4-8 years flat period is not far down the road (though unsure when that will be reached), and high LVR with lower and lower yields are something to be aware of.

 

Perth, 2014. Buyers at peak market are still down a solid 10%. If you had an 80%+ LVR, then when you factor in taxes and fees you are in negative equity - not only have you lost your entire savings but you owe the bank money. If you were negative geared, you're now paying for the privilege of owing the bank money. 3 years later rents have fallen and you are no better off. If you sold, you wouldnt even be able to buy back the property that screwed you over so all you can do is hold and hope. So far you have been waiting 3 years and you still haven't broken even. Hopefully in another 2 years, prices will have recovered enough that you can cash out and start again. Sure if you hold it for another 10 years you will likely catch a boom and make some coin, but wouldn't you just have been better off to not buy at peak market to begin with? That is provided your tenants don't stop paying, wreck the property, or in any other way invoke a massive unexpected bill that you can't afford, because you have no equity to restructure your loan. then the house is repossessed and an investor who waited swoops in at the bank auction and grabs your house for 15% below market value.

So what do you do with your money in the mean time? Leaving it in the bank is not a bad idea at all. Inflation is so low that its hardly devaluing, and like any period of economic uncertainty, liquidity is king. So ride out the next 6 months of uncertainty and make a choice after that. When interest rates start rising, they will pay better dividends on your cash deposit. Not cost you a larger gap between repayments and rental income.

 

Yeah "if" you sold a property after it drops 10% it would be a pretty crap situation, but this should have been factored into when making the purchase and why I said that they should make sure they can service it.

The crux of the problem is that nobody actually knows that it is at peak in Melbourne for properties in his price range of 550k. Or that it will drop instead of slow down after the growth period of the cycle ends. Waiting and not waiting both have risks, and I think understating or ignoring either side of those risks is a mistake.

 

For those waiting it out, or believing prices to fall, what price range are you talking about here? Can you be a little more specific to what market or price price range.

Cause I can tell you my thoughts, anything from 300- 600k after July will move up in price very very quickly. These properties are going to be the winners without doubt.
600-800 will still move up in price.
800-1million will still move in price but no where like the 300-600k mark.
1million-1.5 not sure, stall or drop a little.
1.5million plus, pull back in prices and less demand.

 

we're soon to find out - will history simply repeat itself, would be amazing if it could

 

http://www.econ.mq.edu.au/Econ_docs/research_papers2/2004_research_papers/Abelson_9_04.pdf

House prices in Melbourne over the past 20 years have jumped from a median of 142k in 1997 up to 800k in 2017. It's interesting to look at that chart though. The median house price in Melbourne in 1989 was 132k and in 1996 it was still only at 131k so house prices went nowhere for 7 years in absolute terms. The main difference in this current era is higher rates of population growth (tend to be wealthy migrants) and low interest rates. Once rates start climbing I think history might repeat itself and we'll be in for a long period of stagnation or low capital growth.

 

Immigration policy changed from 1998-99 onwards, direct correlation to accelerated rate of increase in house prices.

 

I can give you one example happening from a first home buyer I'm helping purchase in Melbourne at the moment. Agent had listed to sell privately only, has now changed the sale date to July first by auction, will not accept offers prior. My mate is willing to pay 10k extra than previously as he now has a saving of at least 17k since he has free stamp duty on a price of 425k.

 

and again around 2008 from memory - upped from around 130,000/year to 180/190,000

 

no doubt many sellers/agents in FHB markets will be similarly waiting to maximise on this.. the increase in offers won't only be based on the saving, but sudden the increase in borrowing power..

this stimulus really maxes out at in the mid 600k's (stamp duty sliding scale benefits), and i probably mistook the market "to fly" as it did in 2000.. which was the start of a broader 7+ year run.. i'm just saying, i don't think we're in the same position for that to happen this time round.. would be great if it could continue

 

[QUOTE=". But I'm liking Perth right now. Very big city, close to the long-term mean, has come down considerably in price.[/QUOTE]

I am of the belief that Perth probably had once in the lifetime boom and past performance does not indicate future returns in any asset class. Have a look at the iron ore prices for the past 50 years and you will find that it was only between 2005 to 2014 that iron ore was trading at 3 x its average prices. There is a ridiculous amount of stock available from the past boom, a huge number of people unemployed and all developers are super desperate to sell. I agree that inner ring suburbs are not correcting anymore really but that's not surprising. I work in the Oil and gas industry and I am not optimistic as we are looking forward to future electric car disruption. I don't think there is any other major consumer of iron ore in the world that would buy in scales of China did in earlier years. We may have other commodities but not substantial enough. Overall, I don't see good and sustainable fundamentals that would drive the real estate prices in Perth upwards.

 

India? Nigeria? Huge populations and are just starting the growth that China has seen for decades. These places would need to build housing, a lot of high rises to accommodate the population which requires iron ore. I think ore would be in demand regardless. Probably not in such volumes as seen in 2004 to 2014 but I belive there is still bright future for it.

Can’t say the same about oils and gas.

 

I saw a doco about the boom in India. If it wasn't so risky for foreigners it would be a great money maker.

 

But these countries don't have to import iron ore as China did from Australia. India has huge mining and metals processing industry and even if they have to import these companies are powerful enough to mine it overseas(see Adani). At this point in time, I would say India is self-sufficient in terms of iron ore requirements. The skyscraper industry in India is growing at less than 15% per annum.

 

Big disruption coming in this industry. Since last 5 years, the Oil prices have been subdued and will remain so for foreseeable future. There is enough fear of disruption and over supply at the moment that no companies are ready to do capex.