Beruflich Dokumente
Kultur Dokumente
Click Here To Subscribe to our Newsletter and View More Quality Articles
www.investorsdirect.com.au
Page 1 of 6
Albert Einstein once said: We can't solve problems by using the same kind of thinking we used when we created them. When it comes to solving the problem of finding good value in any real estate market, it is almost impossible to do so if you just think within the real estate paradigm, but it becomes much easier and clearer if you move your thinking above the real estate paradigm and into the finance paradigm. After all, finance is the invisible hand that drives the real estate market.
For example, if the price of a property is $500k, but its value is $600k, then you can say that you have found good value. However if the price of that property is $500k, and its true value is only $400k, then you have bought an overpriced property. So our goal is to always buy properties where the price is lower than its value, and this can be done during both good and bad times in the market. The problem is, no one really knows what the true value of a property is. It is up to each individual to have their own formula. I will show you mine in just a moment, but I need to give you the reasons behind my calculation first.
The shopping centre operator is the banks (e.g. over 90% of the mortgage lending is done by banks in Australia);
Current Examples
Lets look at a few real life examples of this in application: 1. Over the last 15 years, the baby boomers (between the age 50 and 64 currently) have the highest disposable income after mortgage repayments, the banks technically followed them around and threw money at them. 2. Wherever the baby boomers have wanted to live for the last 15 years, the property prices in those areas seem to have gone up much faster, because they can obtain finance very easily and push up property prices. You can say, home prices in the baby boomers stronghold areas have outperformed the average Australian money supply growth which is about 9% a year; 3. During the next 15 years, the baby boomers group will become within 1-15 years of their retirement. Once they have less than 15 years of working income left, banks will stop offering them 30 year mortgages. So all of a sudden, the baby boomers high disposable income will no longer be as powerful as before. 4. For example, the average age of a baby boomer is 58, giving them 7 years until retirement. The banks can only offer a 7 year loan for any home mortgage under normal circumstances, and this can greatly reduce the finance that a baby boomer can obtain, hence slowing down the property price growth in their areas. 5. But for a person who is only 49 today, they can still obtain a 30 year home loan. (If you are over 50, you have to prove to the banks that you can pay off the entire home mortgage without selling your home upon retirement. This has become law since January 2011.) 6. So in the eyes of the banks (i.e. the shopping centre operator), the baby boomers (i.e. the store operators) can no longer afford to pay higher rent (i.e. a bigger mortgage repayment). The banks have to wait for the next opportunity to increase the mortgage size, or find someone else who can afford to take on a bigger mortgage in those areas.
2001-2011 Investors Direct Financial Group
www.investorsdirect.com.au
Page 3 of 6
7. The only issue is that we dont seem to have a large enough group of income earners with
sufficient equity to replace the baby boomers at the moment. Unless the government starts introducing a Second Home Owners Grant or the banks start offering quasi-equity to bridge the equity gap for the next generation. 8. You may have noticed that the baby boomer stronghold areas have not performed that well recently. I would not be surprised to see these areas continue to underperform in the market over the next decade until such time as the next generation of higher income earners gather enough equity to move into these areas while the baby boomers finally decide to downsize. 9. Over the last few years, you may have seen property prices go up quite steadily in the Greenfield areas, i.e. outer suburbs where people buy house and land packages. 10. Traditionally, the income in these Greenfield areas was not high enough to attract banks interest, but the recent immigration trend has changed that condition. In fact, many of these outer suburbs will become middle suburbs over the next 2 decades. 11. The baby boomers currently represent 1/3 of our entire workforce. They can only be replaced by an even larger size of working migrants to keep our tax base sufficient. 12. These new generation of migrants are mostly between the age of 26 and 45, and have qualifications and skills that are in shortage at the moment. Hence they enjoy a higher than average income. But due to their lack of equity, they are not ready to move into the baby boomers stronghold suburbs, which are traditionally second or third home suburbs. 13. Due to the relative higher income and low equity of this new generation of migrants, the mortgage repayments of these migrant families often only represent 30% of a single income. 14. It is very obvious to the banks that these new generations of migrants still have too much income surplus that is not being used to pay for a mortgage. It is the banks duty to empty the pockets of these new migrants just like they did to the baby boomers in the last 15 years! 15. The easiest way to do so is to push the property prices up for the new migrant stronghold areas by lending more money to them. The higher the property prices go, the emptier their pockets will become. 16. This is not to say that the local Gen X and Gen Ys are not important for the banks to follow, but their size is insignificant in comparison to the new migrant population. For example, the new migrants (i.e. 3 million) coming to Melbourne will represent 75% of the entire current Melbourne population (i.e. 4 million), and the new migrants coming to Sydney (i.e. 2 million) will represent 44% of the current Sydney population (i.e. 4.5 million). 17. If the performance of the baby boomers stronghold suburbs for the last 15 years is any guide, we shouldnt be surprised to see the new migrant stronghold suburbs for the next 15 years outperform the average. This trend has become more and more evident over the last 5 years, and I believe it will continue for another decade or so.
performing well at the moment. Simply because the higher income of these new migrants has changed the outlook for these areas. Over 50% of new properties sold in the last 12 months in major cities have been sold to migrants. One can only expect migrants to beget more migrants in the same ethnic community. These suburbs may have a very good chance of outperforming the average over many years to come.
Summary
Most property investors have their own rules when it comes to predicting future property
2001-2011 Investors Direct Financial Group
www.investorsdirect.com.au
Page 5 of 6
performance, but if your rules are based on the wrong underlying reasons, then your prediction can be misleading unless most people also act according to the same wrong underlying reasons, making them all wrong at the same time. Hence it may appear to be right or at least workable. For example, for thousands of years, we all had no problems living under the wrong assumption that the earth was flat. So I am not here to convince you to take on my value formula and abandon the predominant view of the market participants, because regardless of how convincing or logical an argument is, if the majority of the market participants do not agree with it, the argument will be less effective. Hence it is my intention that you only use this value formula as another benchmark to double check your own conclusions of the property market. Personally I am not going to hide the fact that majority of the residential properties in Australia do not currently represent good value based on my value formula. So at this time we need to be even more selective. However, I dont expect property prices to crash either, at least not the properties that represent good value based on the above value formula. But many property investors can get stuck with a non-performing investment portfolio for a long time if most of your properties are overpriced in comparison to their value. So now is a good time to review your entire property portfolio and define a more suitable investment strategy moving forward. Finally, just in case some people may think that there is a secret banker sitting in the dark corner trying to empty your pockets all the time, it is just normal business behaviour for the banks to constantly look for ways to maximize their profit by lending more money to people who can still pay higher interest repayments. You and I would do the same thing if we were given the job to run a bank. I am just glad that the law of maximising the banks profit will never change, hence we can always benefit from this law during good and bad times.
Click Here To Subscribe to our Newsletter and View More Quality Articles
Page 6 of 6